Tax 1-3 Identify items of inclusion, exclusions, deductions, or tax credits. Flashcards
Tax 1-3
- All of the following are itemized deductions except:
a. state and local income taxes
b. investment interest expense
c. casualty and theft losses
d. qualified student loan interest
(LO 1-3)
d. qualified student loan interest.
State and local income taxes, investment interest expense, and theft losses are all itemized deductions. Qualified student loan interest is an adjustment to income.
Tax 1-3
- Which one of the following is not an adjustment to income?
a. state and local income taxes
b. qualified adoption expenses
c. investment interest expense
d. casualty and theft losses
(LO 1-3)
b. qualified adoption expenses
Qualified education interest, alimony payments, and self-employed health insurance deductions are all adjustments to income. Qualified adoption expenses generate a tax credit.
Tax 1-3
- Qualified private-activity municipal bond interest is
a. tax exempt, but it may be included in the computation of the alternative minimum tax
b. taxable for regular income tax purposes, but not included in the AMT computation
c. tax exempt for both regular income tax and AMT
(LO 1-3)
a. tax exempt, but it may be included in the computation of the alternative minimum tax.
Qualified private-activity municipal bond interest is tax exempt, but it is generally included in the computation of the alternative minimum tax. Interest from private-activity municipal bonds issued in 2009 and 2010 is not a preference item for the AMT.
Tax 1-3
- Which one of the following is allowable in the computation of total income?
a. net capital losses of up to $5,000
b. loss from a sole proprietorship
c. charitable contributions
(LO 1-3)
b. loss from a sole proprietorship
Remember that the total income is the amount shown about 2/3 of the way down the front of the Form 1040. It is the amount before the deduction for adjustments to income. Certain deductions are allowed in the computation of total income, such as the deduction for sole proprietorship losses or net capital losses up to $3,000. Charitable contributions are an itemized deduction.
Tax 1-3
- What percentage, if any, of a taxpayer’s self-employment tax may be deductible as an adjustment to income?
0
50%
75%
(LO 1-3)
50%
Only one-half (50%) of a taxpayer’s self-employment tax liability is deductible as an adjustment to income.
Tax 1-3
- Which one of the following is not an exclusion?
a. municipal bond interest
b. gifts and inheritances received
c. workers’ compensation proceeds received
d. unemployment compensation benefits
(LO 1-3)
d. unemployment compensation benefits
Exclusions are income items received by a taxpayer that are not included in income for tax purposes. Common examples include municipal bond interest, gifts and inheritances received, and workers’ compensation proceeds received. Unemployment compensation is essentially a replacement for wages, and is therefore taxable. Note that workers’ compensation proceeds are received on account of a job-related injury, and are not taxable.
Tax 1-3
What is the difference between gross income and total income?
(LO 1-3)
The biggest difference is that there are some subtractions allowed in computing the total income on the tax return that are not deducted in computing the gross income. Some of these deductible items may include losses from certain unincorporated businesses (sole proprietorships, or partnerships) or up to $3,000 of net capital losses.
Tax 1-3
Box 1 of the W2 includes what?
(LO 1-3)
The box 1 amount is the amount of compensation earned by the taxpayer after reduction for amounts contributed to a 401(k), 403(b), or other qualified retirement plan. Also, amounts contributed to a cafeteria plan or flexible spending account (FSA) reduce the amount shown in box 1.
Tax 1-3
Assume a 55-year-old taxpayer with a salary of $100,000 contributes the maximum allowable to her 401(k) ($24,000 including the catch-up amount) and sets aside $2,550 to her FSA. The box 1 amount on her W-2 will show $_______. This is the amount that she will report as wages on her Form 1040.
(LO 1-3)
$73,450
Tax 1-3
How are qualified dividends taxed?
(LO 1-3)
Qualifying dividends are taxed at the rates applicable to long-term capital gains. 0% rate applies if the long-term capital gains fall into the 10% or 15% bracket; 15% applies for long-term capital gains that fall in the 25% to 35% brackets, and a 20% rate applies to long-term capital gains falling into the 39.6% bracket.
Tax 1-3
What type of dividends are “qualified”?
(LO 1-3)
Qualified dividends are generally dividends from shares in domestic corporations and certain qualified foreign corporations which you have held for at least a specified minimum period of time, known as a holding period. You must have held those shares of stock unhedged for at least 61 days out of the 121-day period that began 60 days before the ex-dividend date.
Another requirement is that the shares be unhedged; that is, there were no puts, calls, or short sales associated with the shares during the holding period.
Dividends from CDs, bonds, and savings accounts are not eligible.
Tax 1-3
The vast majority of clients a financial planner will deal with will have between __% and __% of their Social Security benefits included in income.
(LO 1-3)
50% and 85%
Tax 1-3
Certain items of income receive special treatment and are not included as income, and are thus not subject to taxation. These items are called
(LO 1-3)
Exclusions
Tax 1-3
What are the following examples of?
Life insurance proceeds received by reason of death of the insured, a gift or most inheritances received, interest received from municipal bonds, child support received, workers’ compensation insurance proceeds and many employee fringe benefits
(LO 1-3)
Exclusions
Tax 1-3
For a 60 year old taxpayer with AGI of $100,000, no medical expenses are deductible until the total medical expenses exceed $_____. If the taxpayer has $15,000 of medical expenses, only $_____ is deductible—the portion that exceeds the 10% of AGI floor.
(1-3)
$10,000
$5,000
