Module 1 Income Tax Fundamentals and Calculations Flashcards
If Maria and Herman file married filing jointly, with gross income of $330,000 and taxable income of $303,000, what is their marginal tax rate? Refer to the 2023 tax table provided in your course references.
A)
18.45%
B)
32.00%
C)
19.97%
D)
24.00%
The marginal tax rate is 24%.
LO 1.4.2
Ron Bates is a single taxpayer with no dependents. His wage income is $156,850, and he has allowable itemized deductions of $14,000. Ron received $1,000 in interest income from a qualified private activity municipal bond and made an IRA contribution of $6,500. He also received workers’ compensation of $4,000 during the year. Ron is not an active participant in a company-maintained retirement plan.
Using the tax rate schedule provided in your course, what is the amount of Ron’s tax liability for 2023 (round your answer to the nearest dollar)?
A)
$27,259
B)
$26,124
C)
$28,339
D)
$29,299
The total income of $156,850 is reduced by the deductible IRA contribution of $6,500 to give an AGI of $150,350. The IRA is deductible because Ron is not an active participant in a company-maintained retirement plan. The AGI is reduced by the greater of the allowable itemized deductions of $14,000 or the standard deduction of $13,850 in 2023. This leaves a taxable income of $136,350. The interest income from a qualified private activity municipal bond is excluded from income; however, remember that it is generally a preference item for purposes of the AMT. Also, the workers’ compensation received is tax exempt.
Taxable income $136,350
Less (from tax rate schedule) (95,375 )
Amount over $95,375 $40,975
Times (marginal tax bracket) 24%
Tax on amount over $95,375 $9,834
Plus (from tax rate schedule) 16,290
Total tax $26,124
LO 1.5.1
The effective tax rate is obtained by dividing amount of tax by
A)
the amount of tax and total income.
B)
the marginal tax rate uses.
C)
the amount of tax and taxable income.
D)
the taxable income.
The marginal tax rate is found by finding the tax bracket that contains the taxable income amount; it is the amount at which all subsequent taxable amounts will be taxed (until entering the next tax bracket). The effective tax rate is calculated by dividing the calculated tax by taxable income.
LO 1.4.2
To qualify as a head of household, which of the following requirements must generally be met?
The taxpayer must usually be unmarried at the end of the taxable year.
The taxpayer must maintain her home as the principal residence of at least one qualified dependent, with the possible exception of dependent parents, for at least half of the taxable year.
The taxpayer must be a surviving spouse.
The taxpayer must be married at the end of the taxable year.
A)
II and III
B)
I and II
C)
I, II, and III
D)
II, III, and IV
Statements I and II are correct. Caution: Married persons living apart may be able to qualify as heads of household, and dependent parents may be maintained in a domicile other than the taxpayer’s residence. If the dependent is a parent and the taxpayer is entitled to list the parent as a dependent, a nursing home will qualify as the principal residence.
LO 1.1.1
Amanda Elder, a single taxpayer, has the following itemized deductions:
Home mortgage interest (first mortgage) $10,925
State income taxes $17,000
Property taxes $6,000
Charitable contributions $3,000
Gambling losses $3,055
Amanda’s AGI for 2023 is $376,800. Included in the AGI are gambling winnings of $1,500. What is the amount of allowable itemized deductions?
A)
$36,925
B)
$39,980
C)
$38,425
D)
$25,425
d
Itemized:
Mortgage Interest
SALT (State and local taxes, includes prop taxes, up to $10k)
Charitable contributions (learn specifics later)
Gambling losses (to extent of gambling winnings)
If Rachel files single with gross income of $90,000 and taxable income of $76,000, what is her effective tax rate? Refer to the 2023 tax table provided in your course references.
A)
24.00%
B)
15.83%
C)
22.00%
D)
15.41%
b
tax liability / taxable income
22%($76,000 ‒ $44,725) + $5,147 = $6,881 + $5,147 = $12,028 ÷ $76,000 = 15.83%.
LO 1.4.2
Jerry and Margaret Price, both 58 years old, are married and file a joint income tax return. They provide the total support for two dependent grandchildren (full-time students, ages 14 and 16), who have lived with them since their parents (Jerry and Margaret’s daughter and son-in-law) were killed in an automobile accident. In the current year, Jerry earned $140,000, and Margaret earned $80,000. The Prices will contribute a total of $15,000 to their IRAs and anticipate total itemized deductions of $15,000. Neither Jerry nor Margaret is covered by a company pension plan.
Refer to the 2023 tax table provided in your course references to calculate the tax due.
Based on the information given, what will be the Prices’ total tax due for 2023?
A)
$25,415
B)
$25,621
C)
$26,861
D)
$30,981
The salaries of $220,000 are reduced by the IRA deduction of $15,000, and the standard deduction of $27,700 (greater than the itemized deductions of $15,000). The tax liability should be calculated on a taxable income of $177,300. Note: The IRAs are fully deductible because neither spouse is covered by a company pension plan. They may each contribute $6,500 plus the $1,000 catch-up. There is a $4,000 child tax credit ($2,000 × 2) because both children are under age 17 at the close of the tax year, and the AGI is under $400,000.
Salaries $220,000
Less: IRA deductions (15,000)
AGI $205,000
Less: standard deduction (27,700)
Taxable income $177,300
Less (from tax rate schedule) (89,450)
Amount over $89,450 $87,850
Times (marginal tax bracket) 22%
Tax on amount over $89,450 $19,327
Plus (from tax rate schedule) 10,294
Total tax $29,621
Less: child tax credit 4,000
Income tax $25,621
LO 1.4.1
Which one of the following is not a social objective of the federal taxation system?
A)
Revenue raising
B)
Relief for certain child care expenses
C)
Preservation of our nation’s historical buildings
D)
Support of charitable organizations
a
Revenue raising is one of the three main purposes of the federal taxing system; it is not a social objective. Support of charitable organizations, preservation of our nation’s historical buildings, and relief for certain child care expenses (the child care credit) are social objectives of the federal taxation system.
LO 1.5.1
After arriving at adjusted gross income (AGI), which of the following is(are) deductible to arrive at taxable income?
Additional standard deduction
Standard deduction
Itemized deductions if greater than the combined standard deductions
A)
III only
B)
I, II, and III
C)
I only
D)
II and III
Statements I, II, and III are all deductible from AGI to arrive at taxable income.
LO 1.4.1
Which of the following is NOT a step in the tax calculation process?
A)
Reduce tax owed by allowable credits.
B)
Add in the greater of itemized deductions or the standard deduction.
C)
Subtract adjustments to income from total income to get adjusted gross income.
D)
From the final calculation of federal taxable income, find the federal tax owed or refundable.
b
The following are involved in the income tax computation: subtracting adjustments to income from total income to get adjusted gross income, and deducting the greater of itemized deductions or the standard deduction from AGI to arrive at taxable income. The calculation of federal tax is on federal taxable income.
LO 1.1.2
Which one of the following steps is CORRECT concerning the tax calculation process?
A)
Employment eligibility is submitted via Form W4.
B)
Tax liability plus tax credits equals refund or tax owed.
C)
Total tax liability plus additional taxes owed equals total tax liability.
D)
Total tax liability minus withholding and/or estimated tax payments equals refund or tax owed.
d
Notice: option B says “plus”. You don’t add tax credits you subtract them.
Tax liability minus tax credits plus additional taxes owed equals total tax liability. Then total tax liability minus withholding and/or estimated tax payments made equals refund or tax amount owed. Employment eligibility is submitted via Form I-9 and is not considered part of the 1040 calculation.
LO 1.1.2
Janice and Julian Davis, both age 66, are married taxpayers filing jointly. They have itemized deductions consisting of the following:
Home mortgage interest $21,200
State income taxes $9,800
Property taxes $6,300
Charitable contributions $7,700
Gambling losses $9,000
Tax return preparation fee $770
Unreimbursed medical expenses $14,630
Their AGI for 2023 is $413,800, including gambling winnings of $4,000. What is the amount of their allowable itemized deductions?
A)
$69,400
B)
$54,770
C)
$42,900
D)
$49,000
c
Mortgage interest
SALT (up to 10k)
Charitable contributions
Unreimbursed Med Exp (if more than 7.5% of AGI)
Gambling losses (to extent of winnings)
The total itemized deduction amount is $42,900. Note that the tax preparation fee is not deductible. The medical expenses are deductible only to the extent that they exceed 7.5% of AGI for 2023, which they do not. Remember that the deduction for taxes is limited to $10,000. The mortgage interest of $21,200, taxes of $10,000, charitable contributions of $7,700, and gambling losses to the extent of gambling winnings of $4,000 totals $42,900.
LO 1.3.2
Which of the following are deductions against adjusted gross income (AGI) to arrive at taxable income?
Additional standard deduction
Itemized deductions
Exclusions
Tax credits
A)
I, II, III, and IV
B)
III and IV
C)
II and III
D)
I and II
d
Statements I and II are correct. The portion of the formula referred to is:
AGI $xx,xxx
Less the greater of:
Total itemized deductions or standard deduction (including (x,xxx) any additional standard deductions allowed to the taxpayer)
Taxable income $xx,xxx
LO 1.3.1
Which one of the following items is included in the computation of total income on the Form 1040?
A)
Tax credit
B)
Life insurance beneficiary proceeds
C)
Sole proprietorship loss
D)
Penalty on early withdrawal of savings
c
The penalty on an early withdrawal of savings is an adjustment to income; a tax credit is taken from the calculated tax; and life insurance proceeds are not taxed.
LO 1.2.1
What is the lowest marginal income tax rate for a taxpayer in 2023?
A)
0%
B)
10%
C)
5%
D)
15%
b
The lowest marginal income tax rate is 10% for all taxpayers in 2023. The 0% rate is the rate at which it is possible for capital gains to be taxed, depending on the taxpayer’s income.
LO 1.4.2
Which of the following best describes the marginal tax rate?
A)
The effective tax rate used
B)
The rate which is paid on the last taxable dollar
C)
The amount of tax and total income
D)
The amount of tax and taxable income
b
The marginal tax rate is found by finding the tax bracket that contains the taxable income amount; it is the amount at which all subsequent taxable amounts will be taxed (until entering the next tax bracket). The effective tax rate is calculated by dividing the calculated tax by taxable income.
LO 1.4.2
Which of the following statements regarding filing status is CORRECT?
The single filing status is used by unmarried and divorced taxpayers, but not those who are legally separated and who do not qualify for any other filing status.
Taxpayers who file married filing jointly have joint and several liability for the payment of the income taxes due.
A)
Neither I nor II
B)
I only
C)
Both I and II
D)
II only
d
Statement I is incorrect. Taxpayers who are unmarried, legally separated, or divorced individuals who do not qualify for any other filing status generally use the single filing status. Statement II is correct.
LO 1.1.1
Mary and Josh are divorced and have two dependent children. Mary is the custodial parent. Josh is required to pay child support to Mary, who does not work outside of the home. At the beginning of this year, Josh became unemployed and has been unable to find a new job. Because he has not paid any child support this year, Mary and the children moved in with her sister who supported the three of them. By December of the same year, Josh returned to work and resumed child support payments. Who is entitled to list the two children as dependents on their income tax return in 2023?
A)
Mary, who supplied 10% of their support but has custody per the divorce agreement
B)
Josh, who provided 10% of their support this year
C)
No one this year
D)
Mary’s sister, who provided 80% of the children’s support
D
Mary’s sister provided more than 50% of the children’s support. As a result of divorce, the custodial parent can claim the children as dependents on their income tax return unless there is a written agreement to the contrary. In addition, two other requirements must be met:
The children must receive more than half of their support from both parents (combined) for more than half of the taxable year.
If the support requirement is not met, neither parent is allowed to claim the children as dependents.
LO 1.1.1
Sally Franklin has AGI of $300,000. In addition, she currently has passive income of $150,000 and passive losses of $175,000—$150,000 of which she uses to offset the passive income and $25,000 of which is subject to disallowance.
Which one of these investments has the greatest potential for reducing Sally’s tax liability?
A)
A working interest in an oil and gas general partnership
B)
An equipment-leasing limited partnership producing passive losses
C)
“Active participation” rental real estate that is producing a loss
D)
A limited partnership involved in a historic rehabilitation project that is producing passive losses and credits
a
A working interest in an oil and gas partnership can provide unlimited loss deductions against other income. Congress considers this socially desirable to encourage investment in the industry. The caveat is investors in these instruments must also assume unlimited liability. Therefore, a working interest must be a general partnership rather than a limited partnership. The other answer choices cannot offset passive income.
LO 7.1.2
Which one of the following can be a qualifying relative?
A)
Only lineal descendants living in the taxpayer’s principal home during the year, and the taxpayer provided at least 50% of their income
B)
Only a qualifying child
C)
Only related persons living in the taxpayer’s principal home during the year, and the taxpayer provided at least 50% of their income
D)
Anyone who lived in the taxpayer’s principal home during the year, and the taxpayer provided at least 50% of their income
c
A qualifying relative is an individual who is not a qualifying child and bears a specified relationship to the taxpayer such as a parent, in-law, niece, nephew, aunt or uncle, or who is unrelated to the taxpayer but resided in the taxpayer’s principal home during the tax year. The taxpayer must have provided more than half of the person’s support for the tax year.
LO 1.1.1
For a taxpayer with a health savings account (HSA),
A)
the contributions to the HSA are not deductible, but the premiums to the high-deductible health insurance plan are deductible.
B)
all withdrawals from an HSA are tax free.
C)
contributions to an HSA may be made in cash or other property.
D)
withdrawals from an HSA for qualifying medical expenses are not subject to income tax or penalties.
d
Contributions to an HSA are tax deductible and may only be made in cash. Withdrawals from an HSA for qualifying medical expenses are not subject to income tax or penalties; while those of other-than-qualifying medical expenses are subject to both income tax and a 20% penalty unless made after the taxpayer reaches age 65, dies, or becomes disabled.
Mary’s husband died in March of the current year. What filing status should Mary use in the current year?
A)
Single (if she has a dependent child)
B)
Head of household
C)
Married filing jointly (coordinated with the executor/administrator of husband’s estate)
D)
Married filing separately (if she has a dependent child)
Married filing jointly is allowed for a surviving spouse in the year of death. This filing status has the most favorable tax brackets and features the largest standard deduction. The surviving spouse should coordinate this election with the executor of the estate of the deceased spouse.
LO 1.1.1
Mary is an active participant in an employer-sponsored retirement plan, but her husband, Frank, is not. Their combined adjusted gross income (AGI) is $230,000 for 2023. They each contributed $6,500 to an IRA for the current year. Which of the following statements is CORRECT regarding the deductibility of the IRA?
A)
Both Frank and Mary may deduct the IRA contributions.
B)
Neither Mary nor Frank may deduct the IRA contributions.
C)
Frank may deduct his IRA contribution, but Mary may not.
D)
Mary may deduct her IRA contribution, but Frank may not.
b neither
Sparknotes for below section:
Combined income is 230k
They can each have separate pension plans and be active/inactive.
Active (agg) income limit is 116k-136k.
Inactive (agg) income limit is 218k-228k
Phaseouts will be provided on CFP exam.
Neither Mary nor Frank may deduct their IRA contributions. The active participant spouse is subject to a MAGI (AGI without the IRA) phaseout between $116,000 and $136,000 in 2023. The spouse who is not an active participant but whose spouse is an active participant may take a deduction for the contribution, subject to a phaseout between $218,000 and $228,000. Because the AGI exceeds $228,000, neither spouse may deduct the IRA contribution. Remember that those phaseouts apply only if the taxpayer (and/or spouse, if married) is an active participant in a company-maintained retirement plan. These phaseouts will be provided on the exam.
LO 1.1.1
Courtney and Della are considering obtaining a home equity line of credit of $50,000. They will use some of the proceeds to make needed improvements to their personal residence. Della is concerned about the deductibility of the interest. Which of the following statements is(are) CORRECT?
Home equity interest is not deductible to the extent used for other than home acquisition or improvements.
All of the home equity loan interest will be deductible for the couple.
A)
Both I and II
B)
II only
C)
Neither I nor II
D)
I only
I only
Sparknotes:
The question said it will use “some of the HELOC” for needed improvements. Statement I says that the interest for the portion of the HELOC that was used to pay for shit OTHER than the home improvements are not deductible. While the interest from the portion that was used for the improvements is deductible.
Statement I is correct. Home equity loan interest is not deductible on a taxpayer’s income tax return to the extent it is used for other than home acquisition or improvements for the home that secure the mortgage. The interest on the funds used for home improvements is deductible.
LO 1.3.2