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Tax Planning > Module 1: Income Tax Fundamentals and Calculations > Flashcards

Module 1: Income Tax Fundamentals and Calculations Flashcards

1
Q

Single filing status

A

Used for unmarried, legally separated, or divorced individual who does not qualify for any other filing status.

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2
Q

Who can use MFJ status?

A

Spouses in a legally recognized marriage, even if one spouse has no income or deductions, if they are not legally separated or divorced on the last day of the tax year. A surviving spouses may file MFJ if the other spouse dies within the tax year.

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3
Q

Why would a couple file separately?

A

Going through a divorce proceeding or don’t want joint and several liability of MFJ status.

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4
Q

What are some specifics of MFS that might reduce its advantage (limits and filing)?

A

Some deductions and credit are limited to taxpayers using this status. If they file separately and live in a community property state, both spouses must each report half of combined community income and deductions, in addition to any separate income and deductions.

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5
Q

Who may file head of household (HH)?

A

Unmarried individuals who maintain a household for a qualifying child.

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6
Q

List all of the tax filing statuses

A

S, MFJ, MFS, HH, SS

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7
Q

Who may file SS, and why would you?

A

Qualifying widower with dependent child and whose spouse has passed within the past three years. Enables tax payer to use joint income tax return rates.

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8
Q

What are the three criteria for the age test of a qualifying child?

A

Must be either 19, under 24 and a full-time student (last day of tax year), or totally and permanently disabled (anytime during tax year).

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9
Q

What is the support test for a qualified person or relative?

A

The taxpayer must pay more than 50% of their support for the tax year.

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10
Q

What is the maximum income for a qualifying relative?

A

50%

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11
Q

What makes a dividend qualified vs ordinary?

A

The dividend must be held for more than 60 days in the 121-day period that began 60 days before the ex-dividend date.

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12
Q

What dividends can be qualified?

A

Only stock dividends from domestic companies.

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13
Q

Are alimonies taxable and tax deductible?

A

Yes, ONLY if the decree was created after December 31, 2018.

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14
Q

What is the BASIC INCOME TAX formula:

A

Income - exclusions = (total income)
(total income) - deductions for AGI = AGI
AGI = standardized deductions or itemized deductions = taxable income.
Use the taxpayer status to calculate tax, add any other taxes, and subtract credits.

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15
Q

Gross Income

A

All income from whatever source derived except for those items which are excluded.

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16
Q

What are the two components of the Federal Insurance Contributions Act (FICA) payroll tax?

A

Social Security and Medicare

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17
Q

How is SS taxed?

A

12.4% of earning up to taxable wage base

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18
Q

How is the tax split for FICA between wage earners and payers?

A

50-50

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19
Q

What form does a self-employed individual use?

A

Schedule C

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20
Q

What’s a Schedule E form?

A

Used for rental real estate, royalties, partnerships, S corps, estates, trusts…

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21
Q

What is a chief advantage of the S corp entity?

A

Not having to pay taxes on all income to shareholders

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22
Q

What is the annual maximum amount of losses that can be used to offset ordinary income (hint: different for MFS)?

A

$3,000 ($1,500 for MFS)

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23
Q

What is the imputed interest rule?

A

When a lender has engaged in a below-market-interest rate loan transaction, they may be required to impute interest income even without receiving it, and the borrower may receive a deduction.

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24
Q

Constructive Receipt Rule

A

Income that is constructively received is taxed to a taxpayer as if it had actually been received.

25
Q

What is the qualified prize option?

A

Applies to individuals who win the lottery. if the state allows, you may receive the income in the year that the payments are made versus all at once, as you would ordinarily be required to under the constructive receipt rule.

26
Q

What’s the tax treatment for a clawback?

A

You pay the bonus back and get a credit for the taxes you already paid.

27
Q

What is the difference between compensatory and punitive damages?

A

Punitive are to punish, whereas compensatory are to make the party whole. Compensatory damages are income tax free to the injured party, unless they are discrimination cases. Punitive are taxable, unless the result of a wrongful death suit.

28
Q

What is the tax treatment for a lump sum payment?

A

Tax free, but earnings aren’t if the injured decides where the money is invested.

29
Q

What are fringe benefits?

A

Fringe benefits are a part of the compensation package given to an employee who is not salary but consists of valuable consideration such as employer-paid health insurance, life insurance, retirement plan contributions, and educational assistance.

30
Q

How are reimbursements taxed?

A

If the plan is nonaccountable (employees need not substantiate), then it requires that they be included on W-2 as taxable income.

31
Q

Group Term Life Insurance taxability

A

An employee can exclude premiums paid by employer on first $50k.a

32
Q

Accident and Health Plan taxability?

A

The portion of the benefit that is paid by the employer is taxable to the employee.

33
Q

Imputed interest rules for compensation-related loans

A

The lender(employer) has interest income and compensation expense for the amount of the imputed income, and the borrower has compensation income and interest expense for the same amount.

34
Q

What does the Periodic Payment Settlement Act of 1982 allow?

A

For damages to be paid out periodically

35
Q

What is the floor (minimum) on allowable medical expense deductions?

A

7.5% of AGI

36
Q

Limits on allowable casualty loss deductions

A

$100 floor, anything beyond that is only taxable if more than 10% of AGI. Personal casualty losses are only deductible if they occur in a federally declared disaster area.

37
Q

MAGI use

A

Used to calculate many phaseout limits, such as student loan interest deduction and child tax credit

38
Q

Are Roth IRA contributions deductible?

A

Never.

39
Q

Who can contribute to an IRA?

A

Workers of any age with an earned income.

40
Q

When must an RMD be taken?

A

The calendar year after the participant reaches 72.

41
Q

Who can deduct 100% of health insurance coverage for themselves, spouses and dependents?

A

Self employed taxpayers and those who are more than 2% shareholder of an S corporation.

42
Q

What’s the penalty for a non-qualifying HSA expense, and what are the expenses?

A

Income tax and 20% penalty (unless after 65, dies, or becomes disabled.)

43
Q

What is the treatment for mortgage debt acquired before December 15, 2007?

A

Deductible qualified residence interest is interest on debt secured by a principal or secondary residence of a max of $1mm ($500k for MFS).

44
Q

What is the mortgage treatment for new debt?

A

Deductibility is limited to $750k, and the interest on a home equity loan is no longer deductible after 2017 is used for personal expenses.

45
Q

What is the tax treatment for points?

A

They must be capitalized and amortized over the life of the loan since they are prepayments of interest. If points are incurred on a loan to improve home, they are deductible.

46
Q

What are the five types of interest expenses that may be incurred by a taxpayer?

A

Consumer interest, qualified residence interest, investment interest expense, business interest, passive interest

47
Q

What are the two types of qualifies residence interest, and what is currently the main difference?

A

Acquisition indebtedness and Home equity loan indebtedness.

48
Q

What taxes are deductible on schedule A form, and what is the max?

A

SALT: state and local taxes. Max deduction is $10k.

49
Q

Personal Casualty Losses are only deductible in what scenario?

A

A federally declared disaster.

50
Q

How do you calculate the deductible casualty loss?

A

The difference in FMV as a result of the loss - insurance reimbursements - $100 - 10% of AGI

51
Q

What is the limit for the investment interest expense?

A

Deductible up to the taxpayer’s taxable investment income.

52
Q

What is the max tax rate for Social Security?

A

85%

53
Q

What’s the difference between an effective tax rate and an average tax rate?

A

An effective tax rate uses taxable income, while the latter uses total.

54
Q

Equivalent tax benefit formula?

A

TC = d x m, where TC = tax savings, d = before-tax benefit, and m = marginal income tax bracket

55
Q

What are the two types of tax credits and what is the main difference?

A

Refundable and nonrefundable. Nonrefundable will, at best, bring your tax liability to zero.

56
Q

What is the most common amount of tax credit per child/dependent, and how is it derived? (per the child and dependent care tax credit). Is this refundable?

A

The eligible expenses are capped at $3,000 per child, and the sliding scale starts at 20% for taxpayers with more than $43k of AGI. Nonrefundable

57
Q

What is the child tax credit amount? and above what MAGI is it reduced in what quantities? anything else?

A

up to $2k ($1.5k refundable), for each qualifying child under 17. Is it reduced by $50 for every $1k above $400k of MAGI for couples filing jointly ($200k for others). there is also an additional credit of $500k

58
Q

Adoption credit

A

In the year that adoption is finalized, and the balance can be carried further.

59
Q

Residential energy

A

30% of amounts paid.

Tax Planning (6 decks)

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