REG 1 - Individual Tax Part 1 Flashcards
What is the individual income tax formula?
Gross Income
(Adjustments)
=Adjusted gross income
(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
What is a qualifying widow(er) filing status?
Needs to meet the following criteria:
- Can be used two years following the death of spouse (i.e. spouse dies in Y1, can be used for Y2 and Y3)
AND
- Surviving spouse must pay over half the costs of maintaining the household where dependent child lives for the WHOLE tax year. Dependent child can be child (including adopted but not foster) or stepchild of the surviving spouse
What is the head of household filing status?
Needs to meet the following criteria:
- Must be unmarried, legally separated, or married and has lived apart for the last six month of tax year
- individual not considered a qualifying widower
- individual is not a nonresident alien
- The individual maintains the home for more than six months is the principle resident of a qualifying person (dependent child, parent, or relative)
To meet the head of household filing status what qualifying person MUST live with the taxpayer?
- Qualifying child
- Father or Mother
- Dependent Relatives
- Qualifying child (includes foster child)- does NOT need to live with the taxpayer but needs to meet the qualifying children rules
- Father or Mother - does not need to live with the tax payer but taxpayer needs to maintain their home (half the upkeep costs)
- Dependent Relatives - MUST live with taxpayer. Relatives include grandparents, brothers, sisters, aunts, uncles, nieces/nephews, in laws. COUSINS, FOSTER PARENTS, and unrelated dependents do not apply
What are the two dependency categories?
Qualifying child and Qualifying relative
What are the criteria for a qualifying child?
Think of the acronym CARES.
Close Relative - must be taxpayer’s son/daughter, stepson/daughter, brother/sister, stepbrother/sister, or descendant of any of these.
Age Limit - “child” needs to be under 19 or 24 if full time college student. Full-time is defined as 5 months of the year
Residency and Filing Requirements - must live with the taxpayer for more than half the tax year. “Child” must be a citizen of US, Mexico, or Canada
Eliminate Gross Income Test - this does not apply to “child”
Support Test - “child” must not have contributed more than half of support. Scholarships are not considered income for son/daughter & stepson/step daughter. This scholarship exclusion does not extend to siblings and descendants.
What are the criteria for a qualifying relative?
Think of the acronym SUPORT.
Support Test - taxpayer must have contributed more than one half of support; and,
Under Gross Income Limitation - gross taxable income must be under $4,400. Excluded from taxable income is SS checks, Tax Exempt interest income (state and muni interest income), and tax exempt scholarships; and,
Precludes Dependent Filing a Joint Return - EXCEPTION if there is no tax liability on the return then a joint return is okay; and,
Only citizens of the US, Canada, or Mexico; and,
Relatives - children, grandchildren, grandparents, siblings, aunts/uncles, nieces/nephews (also stepchildren/stepparents/stepsiblings, too); OR,
Taxpayer lives with individual (non relative) the whole year. A non relative member can qualify as long as they live with taxpayer the whole year (foster parents & cousins included)
Are state and local tax refunds taxable income in a subsequent year?
Depends. It is not taxable if the taxes paid did not result in a tax benefit in the prior year.
if itemized in the prior year = state and local refund is taxable
Standard deduction used in prior years = state of local refund is nontaxable
How are payments taxed for a divorce:
Alimony/Spousal Support Payments
Child Support
For alimony it depends on when the divorce was executed:
2018 and earlier - included in gross income of recipient, deducted from gross income by payor 2019 and later - excluded in gross income of recipient, not deductible in gross income for payor
For Child Support:
Not taxable or tax deductible. Child support payments are allocated to child support first then to alimony (for tax purposes in 2018 and earlier)
What are the exceptions to the penalty tax for early IRA distributions?
Think of the acronym “HIM DEAD”. this is to avoid the 10% penalty
H- first Home purchase, max of $10K
I- Insurance (Medical) - unemployed 12 consecutive weeks of unemployment comp; self employed
M- Medical expenses in excess of percentage of AGI floor
D - Disability
E- Education - college tuition, books, fees
A- Adoption or birth, $5K max
D- Death
Once the QBI deduction is calculated based on the taxpayer’s eligibility, what is the overall deduction limited to?
The lessor of the:
combined QBI OR 20 percent of the taxpayer’s taxable income in excess of capital gain
What is the QBI deduction for a qualified trade or business (QTB):
Filing Type: Single Taxable Income before QBI deduction: $192,550 Net capital gains: $0 QBI: $80,000 QTB's W-2 wages: $20,000
Tentative QBI deduction $80,000 x 20% = $16,000
W-2 wage limitation; $20,000 x 50% = $10,000
$16,000 - $10,000 = $6,000 excess amount
Calculation of phase in percentage:
$192,550 taxable income - $170,050 (phase in range) = $22,500
$22,500/$50,000(phase-in range) = 45%
**phase in range is $170,050 to $220,050
$6,000 excess amount x 45% phase in percentage = $2,700
$16,000 tentative QBI deduction - $2,700 reduction amount = $13,300 reduced QBI deduction
What is a passive activity and how are losses treated ?
A passive activity is: any activity in which such taxpayers do not materially participate and rental real estate investments regardless if they materially participate or not.
They cannot be used to offset portfolio income and can be carried forward but NOT back. In the year of disposable you can offset losses against any other income source (active, portfolio, or passive)
what is the mom and pop exception for real estate passive losses?
if TP materially participates in real estate and has 10% or more ownership then they can deduct losses up to $25K. There is a phase out for $100K to $150K in AGI. It is 50 cents on the dollar.
what are the requirements for an EE Savings Bond to receive tax exemption on the accumulated interest?
- the purchaser of the bond must be the sole owner (or joint owner with his or her spouse)
- the issue date of the bonds must follow the 24th of the owners
- the redemption proceeds must be used to pay tuition and fees of the taxpayer, spouse, or dependent to attend college (or vocational school)
