Module 8 Taxes

Question 1

Name the four filing statuses

Answer 1

Single
Married filing joint
Married filing separate
Widowed

Question 2

adjustments for AGI (Above-the-line deductions)

Answer 2

deductible IRA contributions
student Loan interest deduction (up to $2,500)
HSA Contributions
1/2 Self-Employment tax
alimony paid under pre-2019 agreement
Educator Expenses
moving expenses for military
self-employed insurance costs
retirement plan contributions
certain expenses for reservists performing artists, and fee-
based government officials
penalties for early withdrawals from savings plans
$300 or $600 charitable deduction (CARES Act)

Question 3

Itemized deductions (Schedule A)

Answer 3

Qualified Medical Expenses > 7.5% of AGI
Qualified State/Local Taxes:
     *Income (foreign, too)
     *Real Estate
     *Personal property
Interest Expenses:
     *Qualified home mortgage interest/points
     *Investment interest
Charitable contributions
Personal casualty losses for federally-declared disasters
Miscellaneous Itemized Deductions:
     *Gambling losses
     *Unrecovered annuity basis

Question 4

Calculating refund or amount owed

Answer 4

calculate tax liability (tax tables)
less tax credits (dollar for dollar reduction)
plus additional taxes owed
equals total tax liability
less withholding and/or estimated tax payments made
equals refund or amount owed

Question 5

Effective tax rate formula
Gross Income $120,000
Taxable Income $85,000

Answer 5

taxes paid/taxable income $10,197/$85,000 = 12%

MFJ Up to $19,900 @10% = $1,990
$81,050 - $19,990 = $61,150 @ 12% = $7,338
$85,000 - $81,050 = $3,950 @ 22% = $869
$10,197

Question 6

What is the purpose of Internal Revenue Code?

Answer 6

Raise revenue
Redistribute
Reform behavior
Reelection for politicians

Question 7

What types of income are included in Gross Income.

Answer 7

tips
taxable interest
dividends received

Question 8

What is an above-the-line deduction?

Answer 8

Deductible IRA contributions.

Generally subtracted from gross income to arrive at adjusted gross income.

Question 9

What are some below-the-line deductions?

Answer 9

State taxes paid by individual
medical expenses
gifts to charities

Question 10

What is the maximum amount of Social Security benefits that may be subject to taxation?

Answer 10

85%

Question 11

What is a taxpayer’s basis in property received as a gift

Answer 11

The same basis as that of the person who gave the taxpayer the gift.

Question 12

What are the common nonrecognition transactions?

Answer 12

Gain from the sale of a principal residence
property transferred via divorce or gift may still be subject to capital gain tax at sale.
property transferred by selling it to a family member may be subject to capital gain tax.

Question 13

What is the first step in the filing process

Answer 13

Determine a taxpayer’s proper filing status.

Question 14

Where will a standard deduction be taken from?

Answer 14

Adjusted Gross Income (AGI), arrives at taxable income.

Itemized deductions are taken from AGI as well.

Question 15

What is the highest long-term capital gains tax rate?

Answer 15

Twenty percent is the highest long-term capital gains tax rate.
Twenty-eight percent is the maximum long-term capital gains tax rate for collectibles.
a 0% long-term capital gains tax rate applies to taxpayers who have relatively low taxable incomes - $80,800 for joint returns or $40,400 for single taxpayers.

Question 16

In January 2018, Phan purchased Alpha stock for $3,000, which included a broker’s commission. In October 2020, he sold the position and netted $7,400 after deducting the broker’s commission. In January 2020, Phan bought a position in Gamma stock for $4,900. In September 2020, he sold the position and netted $4,500. Which of these describes the Phan’s net capital gain or loss?

Answer 16

A net long-term capital gain of $4,000.

The gain is characterized as a net long-term capital gain of $4,000, $7,400 - $3,000 = $4,400 long-term capital gain (LTCG). $4,900 - $4,500 = $400 short-term capital loss (STCL). Net the two results: $4,400 LTCG - $400 STCL = $4,000 net long-term capital gain (LTCG).

Question 17

What is reported on Schedule A?

Answer 17

Itemized deductions

Question 18

What is reported on Schedule B?

Answer 18

Interest earned and dividends received

Question 19

What is reported on Schedule C?

Answer 19

Sole proprietorship income and expenses.

Question 20

What is reported on Schedule D?

Answer 20

Capital gains

Question 21

What are the tax consequences of tax credits?

Answer 21

Tax credits reduce a taxpayer’s actual tax liability on a dollar-for-dollar basis.

Question 22

What employer-offered benefits would result in the greatest amount of tax savings from an income of $2,500 of discretionary income available.

Answer 22

Ability to make contributions to a flexible spending account (FSA).

There are no income taxes or FICA (Social Security) taxes due on contributions made to a flexible spending account.
Contributions to a 401 (k) plan are pretax, which would save paying income taxes on current income. However, the contributions are still subject to FICA taxes.
A company discount will save an employee money if the employee makes a purchase, but it will not result in any tax savings (or possibly just a marginal amount of savings on sales tax). The ability to purchase additional group life insurance will not result in any tax savings.

Question 23

Is it possible to have a marginal tax rate of 24% and an effective tax rate of 28%?

Answer 23

The effective tax rate is the amount paid in taxes divided by gross income. The marginal tax rate is the rate at which the last dollar was taxed. The marginal rate will always be higher. Because the U.S, tax system is mathematically progressive (i.e. the first “bucket” of dollars earned is only taxed at a rate of 10%, the second “bucket” at 12%, etc.), the marginal rate is invariably higher than the effective rate.

Question 24

What is a characteristic of Section 529 plans?

Answer 24

Account beneficiary can be changed

Changing the account beneficiary is a beneficial characteristic, they also allow for large amounts to be contributed and offer tax deferral of earnings, and there are no contribution phaseout thresholds for high-income individuals.