r1-m1/2 Flashcards
Individual Income Tax Formula
Gross income
(Adjustments)
=AGI
(Standard deduction)
or
(Itemized deduction)
=taxable income before QBI deduction
(QBI deduction)
=Taxable income
Federal Income Tax
(Tax Credits)
Other taxes
(Payments)
=Tax due or Refund
Who must file?
- if their income is equal to or greater than the sum of; the regular standard deduction amount plus the additional standard deduction amount for tax payers age 65 or older or blind (except for married persons filing separately
- Self emplyment income is $400 or more
When to file?
April 15
Extension
Automatic 6 month extension to October 15
-not an extension to pay the taxes
-form 4868 by April 15
You are considered unmarried for the whole year if…
on the last day of your tax year, you are ether unmarried or legally separated
Qualifying widower
-two years after spouses death
-principal residence for dependent child
-child has lived in home for all of the current year
-paid over have of the costs of keeping up a ome for the child
-could have filed a joint return in the year the spouse died
Head of Household
Entitles certain taxpayers to pay lower taxes. To qualify the following conditions must be met
1. The individual is unmarried, legally separated, or married and has lived apart from spouse for the last six months of the year as of the close of the taxable year.
2 The individual is not qualifying widower
3. the individual is not a nonresident alien
4. the individual maintains as his or her home a household that, for more than HALF the taxable year, is the principal residence of a qualifying person, including a dependent child, parent, or relative
Qualifying Child (CARES)
Close relative
Age limit
Residency and filing requirements
Eliminate
Support
Qualifying Relative (SUPPORT)
Support test
Under a specific amount of taxable gross income test
Precludes dependent filing a joint tax return test
Only citizens
Relative test
Taxpayer lives with individual for whole year
Close relative
son, stepson, brother, stepbrother, or descendent of any of these. Foster child, adopted child or a child who is lawfully placed
Age limit
younger than 19 or 24 in the case of a full time student
-no age limit for permanently disabled
Support test
must not have contributed more than half of his support
-support means actual expenses incurred by or on behalf of the dependent
-scholarships do not apply
Under Gross Income Limitation
Close relative may not be claimed as a qualifying relative unless gross income is less than $4700
-only income that is taxable is included for gross income limitation
Multiple Support Agreements
where two or more taxpayers together contribute more than 50% of the support of a person but none of them individually contribute more than 50%
-contributors must have contributed more than 10% to meet dependency tests
-form 2120
General Rule (Custodial Parents)
-parent who has custody of the child for the greater part of the year qualifies to use the child as a dependent
- if equal custody the parent with he higher adjusted gross income
Gross Income
All income from whatever source derived, unless specifically excluded
In cases of noncash income, the amount of income is the…
fair market value of the property or services received
-nontaxable is net book value
Realization
What really happened in the real world. Requires the accrual or receipt of cash, property, or services, or a change in the form or nature of the investment
Recognition
What you record on your records. Means that the realized gain must be included on the tax return and cannot be excluded or deferred
Accrual Method
records revenue when a sales transaction occurs. Revenue is taxable when earned
-GAAP
Cash method
recognition occurs in the period the revenue is actually or constructively received in cash or fair market value of property
Taxable fringe benefits (non statutory)
The fair market value of a fringe benefit not specifically excluded by law is includable in income. For example, an employees personal use company car is included as wages in an employees income and is subject to employment taxes
Nontaxable fringe benefits
-life insurance coverage
-accident, medical, and health insurance (employer paid)
-De minimis fringe benefits
-meals and lodging
-employer payment of employees educational expenses
-employee adoption assistance program
-dependent care assistance
-qualified tuition reduction
Taxable interest income
-interest from federal bonds
-interest from industrial development bonds
-interest from corporate bonds
-part of the proceeds from an installment sale is taxable as interest
-interest paid by fed or state for late payment of a tax refund is taxable
Forfeited interest (adjustment)
-penalty for early withdrawal of savings
-the amount forfeited is also deductible as an adjustment
-only pay tax on the amount of interest actually received
-amount is deducted separately and not netted with interest income
Tax exempt interest income (Reportable but not taxable)
-state and local government bonds/obligations
-bonds of a US possession
-US series EE Savings Bonds
Dividend Income (Schedule B)
The taxability of the dividend is determined by the amount of the company’s earnings and profits:
-corporate earnings and profits -> taxable dividend
-no earnings and profits and taxpayer has basis in stock ->nontaxable and reduces basis of stock
-no earning and profits and no stock basis ->taxable capital gain income
Taxable dividends
All dividends that represent distributions of a corporations earnings are includable in gross income
cash = amount received
property = fmv
Capital Gain distribution
Distributions by a corporation that has no earnings and profits, and for which the shareholder has recovered his or her entire basis, are treated as taxable gross income
Nonqualified dividends
-employer stock held by an employee stock ownership plan
-amounts taken into account as investment income
-short sale positions
-certain foreign corporations
-dividends paid by credit union
Qualified dividends holding period
the stock must be held for more than 60 days during the 120 day period that begins 60 days before the ex dividend date
Tax free distributions
-return of capital
-stock split
-stock dividend (unless cash or property option/taxable fmv)
-life insurance dividend
Alimony/Spousal Support Payments
Alimony or spousal support payments made pursusant to a divorce or separation agreement executed on or before Dec 31, 2018 are included in gross income by recipient and deductible by the payor. For payments after Dec 31, 2018 no payment is included nor deducted.
Child support
-nontaxable: if any portion of the payments is fixed by the decree or agreement as being for the support of minor children
-payment applies first to child support: if the decree or agreement specifies that payments are to be made both for alimony and for support, but the payments subsequently made fall short of fulfilling these obligations, the payments will be allocated first to child support and then to alimony
Property settlements (nontaxable)
if a divorce settlement provides for a lump-sum payment or property settlement by a spouse, that spouse gets no deduction for payments made and the payments are not includable in the gross income of the spouse receiving the payment
Business Income or Loss
Net business income or loss from a sole proprietorship is calculated on Schedule C and reported on form 1040 as a single item
Gain and losses on disposition of property
measured by the difference between the amount realized and the adjusted basis
IRA distributions
Distributions for IRAs consist of principal contributions and earnings. The tax treatment of a distribution depends on whether the distribution is from traditional IRA or a Roth IRA
Any taxable distributions from IRAs are taxes as ordinary income regardless of the type of income, such as capital gain, that was earned while the funds were invested
Distributions of principal contributions are taxable if the taxpayer…
Distributins from traditional IRAs
took a deduction for the contribution when made
Distributions of earnings are always taxable, whether…
Distributins from traditional IRAs
or not the taxpayer deducted the contribution when made
How is a distribution from a nondeductible, traditional IRA allocated?
Allocated between principal (contributions) and earnings pro rate based on relative amounts in the IRA account at the time of the distribution
When is a taxpayer required to start taking minimum distributions?
April 1 of the following year in which the taxpayer reaches 73
Are distibutions from a Roth IRA taxable?
never because taxpayers are not allowed to deduct contributions to a Roth IRA
When are earnings from a Roth IRA taxable?
only if the distribution is a nonqualified Roth distribution
What is a qualified distribution (Roth)
- Is made at least 5 years after the first day of the year in which the taxpayer made his or her first contribution to the ROTH IRA, and
- Meets on of the following requirements’
-taxpayer is age 59.5 or older
-disabled
-a first time homebuyer and uses distribution to purchase a home
-distribution is made to a beneficiary after the taxpayers death
Penalty Tax
A premature distribution before age 59.5 is subject to a 10% penalty tax in addition to regular income tax.
Exceptions to penalty taxes
There is no penalty if the premature distribution was used to pay:
-first time homebuyer
-insurance
-medical
-disability
-education
-adoption or birth
-disaster
-death
Is unemployment income included in gross income?
Yes
Social Security Income taxable?
Social security received might be included in income. Taxpayers are classified into five categories depending on the level of modified AGI.
What is included in Modified Adjusted Gross Income?
Modified AGI or Provisional income includes:
-any income excluded bc of foreign earned income exclusion
-any exclusion or deduction claimed for foreign housing
-any interest income from series EE bonds that was able to be excluded bc qualified higher education expenses
-any deduction claimed for student loan interest or qualified tuition related expenses
-any employer paid adoption expenses
-any deduction claimed for annual contribution to a traditional IRA
How are prizes and awards taxed?
At fair market value - taxable income
Gambling Winnings and Losses
Winnings are included in gross income
losses may be deducted to the extent of gambling winnings. Gambling losses include the expenses the taxpayer incurred in connection with the gambling activity
Damages awards
If a damage award is compensation for lost profit, the award is income
-in lieu of = taxable
Punitive Damages
Fully taxable as ordinary income
Cancellation of Debt (COD) Income
If a taxpayer borrows money from a commercial lender and the lender later cancels or forgives part or all of the debt, the canceled debt is generally included in income.
Scholarships and Grants
Degree seeking student - excludable only up to amounts actually spent on tuition, fees, books
Non-degree seeking student: fully taxable at FMV
Life Insurance Proceeds
The proceeds of a life insurance policy paid bc of the death of the insured are excluded from the gross income of the beneficiary
-interest income on deferred payout is fully taxable
Gifts and Inheritances
Not included in gross income
Medicare Benefits
Excluded from gross income
Workers Compensations
Excluded form gross income
Foreign Earned Income Exclusion
Taxpayers working abroad may exclude from gross income up to $120,000 of their foreign earned income. Must satisfy one of the following
1. Bona fide residence test: be resident of a foreign country for entire year
2. Physical presence test: be present in the foreign country for 330 full days out of any 12 consecutive month period
How long must the taxpayer maintain a home that is a principle residence in order to qualify as a head of household?
more than half the year
How long must the taxpayer maintain a home that is a principle residence in order to qualify as a surviving spouse?
entire year
If you itemize can you deduct a tax refund?
Yes, only if you itemize you can deduct the tax refund because you deducted state income taxes.
What are the two conditions for a prize or a reward to be excluded from gross income?
-they do no enter into a contest (without any action on the individuals part)
-they assign the award directly to a governmental unit or charitable organization
What is the amount that is not taxable of group life insurance?
The first $50,000 is nontaxable as a fringe benefit
Are employer contributions to a qualified traditional defined contribution retirement plan and earnings taxable?
No not taxable until distributed
What is a requirement for a Series EE bond in order for interest to be excluded?
The interest is used to pay tuition for the taxpayer, spouse, or dependent enrolled in higher education.
-purchaser must be sole owner of the bonds
The interest exclusion is reduced by…
Series EE Bonds
qualified scholarship’s that are exempt from tax and other nontaxable payments
Is interest income on federal tax refund taxable?
Yes, even though the federal refund itself is not taxes
Is interest income from US treasury certificates taxable?
Yes, interest income from US obligations is generally taxable
Is interest on state government obligations taxable?
No
Is interest from state and municipal bonds taxable?
No
If I take a standard deduction and receive a refund the following year is it taxable?
No
When do you have to recognize gains and losses when selling stock or securities?
The trade date
What is the maximum amount of benefits to be included in gross income?
The maximum amount of taxable Social Security benefits is 85% of social security benefits received
