Tax Chapters 1-5 Flashcards
1
Q
Which amendment allows the government to collect taxes?
A
The 16th Amendment
2
Q
What are the 3 categories of tax law objectives?
A
Political, Economic, Social
3
Q
Why is tax law complex?
A
Because of the political, economic, and social objectives.
4
Q
What percent of federal revenues are from personal income tax?
A
81%
5
Q
What are the 3 tax rate structures?
A
Progressive, Proportional, Regressive
6
Q
How does a progressive tax work?
A
The rate increases when the base increases
7
Q
What tax rate structure does federal or state income tax use?
A
Progressive
8
Q
How does a proportional tax work?
A
The rate is the same for everyone (flat tax).
9
Q
What tax rate structure does property tax use?
A
Proportional
10
Q
How does a regressive tax work?
A
The rate decreases as the base increases
11
Q
What tax rate structure does FICA (Social Security use)?
A
Regressive
12
Q
What tax rate structure does sales tax use?
A
Regressive
13
Q
How do you calculate an average tax rate?
A
Total tax liability divided by taxable income
14
Q
What is the name of the tax rate applied to an incremental amount of taxable income?
A
Marginal tax rate
15
Q
Which type of tax rate is the most useful for tax planning? (It measures the effect of a proposed transaction.)
A
Marginal tax rate
16
Q
What are the 5 criteria for evaluating tax structures?
A
Equity, Certainty, Convenience, Economy, Simplicity
17
Q
What is horizontal equity?
A
Similar taxpayers pay similar tax
18
Q
What is vertical equity?
A
Dissimilar taxpayers pay different tax
19
Q
Why is it hard to determine what constitutes a fair tax structure?
A
Fairness is subjective
20
Q
When changes are made to the tax code that affect decisions taxpayers made in the past, which criteria for evaluating tax structures does this violate?
A
Certainty
21
Q
What factors are considered when evaluating the economy of a tax structure?
A
The cost of compliance and administration
22
Q
What 2 types of entities pay taxes on taxable income?
A
Individuals and C-Corps
23
Q
What are the 6 types of flow-through entities?
A
Sole proprietorship, partnership, S-corp, LLC, LLP, Trust
24
Q
What are the 3 sources of tax law?
A
Legislative, Executive, Judicial
25
What are 2 types of legislative sources of tax law?
Internal Revenue Code, House Ways & Means Committee
26
What is the highest authority of tax law?
Internal Revenue Code
27
What is the limitation of the Internal Revenue Code?
The language is not specific
28
What is the executive source of tax law?
Rulings
29
What is the judicial source of tax law?
Court decisions
30
What is the statute of limitations for auditing a fraudulent return?
Indefinite
31
What is the statute of limitations for auditing a return where a gross income item in excess of 25% is omitted?
6 years
32
What is the general statute of limitations for auditing a return?
3 years
33
Can a taxpayer be audited after they receive a refund?
Yes
34
How is Gross Income calculated?
Income from whatever source derived minus exclusions
35
How is Adjusted Gross Income (AGI) calculated?
Gross income minus deductions for AGI
36
How is Taxable Income calculated?
AGI minus greater of itemized deductions or standard deduction, minus personal and dependency exemptions
37
How is tax payable (or refund due) calculated?
Taxable income times the applicable tax rates, minus credits and prepayments
38
What is income?
An economic benefit that the taxpayer realizes
39
What are the four types of income?
Money, Property, Services/Bartering, Debt Relief
40
What are the 2 deductions from AGI?
Standard Deduction or Itemized Deductions and Exemptions
41
What is the standard deduction for Married Filing Jointly?
$12,200
42
What is the standard deduction for surviving spouses?
$12,200
43
What is the standard deduction for Head of Household?
$8,950
44
What is the standard deduction for a Single taxpayer?
$6,100
45
What is the standard deduction for Married Filing Separate?
$6,100
46
What are the 2 possible standard deductions for dependents?
The greater of $1,000 or earned income plus $350 (up to $6,100)
47
What is the additional deduction for an aged or blind taxpayer (married or surviving spouse)?
$1,200
48
What is the additional deduction for an aged or blind taxpayer (single)?
$1,500
49
What is the amount of a personal exemption?
$3,900
50
Can a dependent have a personal exemption?
No
51
What are the 4 requirements that a person must meet to be a dependent?
Social security number, Citizenship, Separate returns if married, No dependents of their own
52
What are the 4 qualifying child tests?
Relationship, Age, Abode, Support
53
What is the relationship test for a qualifying child?
Must be a child/sibling of the taxpayer or a descendent of either
54
What is the age test for a qualifying child?
Must be either under 19, a full time student (5+ months) under 24, or permanently and totally disabled
55
What is the abode test for a qualifying child?
Must have the same principal abode as the taxpayer for over half the year
56
How can a noncustodial parent claim a child as a dependent?
If the custodial parent agrees to give up the exemption in writing (Form 8332)
57
What is the support test for a qualifying child?
The child cannot provide over half his/her own support
58
What are the 3 qualifying relative tests?
Relationship, Gross Income, Support
59
What is the relationship test for a qualifying relative?
Must live with taxpayer over half the year (related or not), or must be a parent, grandparent, aunt, uncle, stepparent, in-law, or child of the taxpayer
60
What is the gross income test for a qualifying relative?
Dependent's gross income must be under $3,900 (excluding scholarships, nontaxable bond interest, and social security benefits)
61
What is the support test for a qualifying relative
The taxpayer must provide over half the total support (the total includes any amount spent by the dependent or other individuals on support, including welfare and social security benefits
62
What is the first tie-breaker for determining who can claim a dependent?
Taxpayers who can claim qualifying child have priority over taxpayers who can claim qualifying relative
63
What is the second tie-breaker for determining who can claim a dependent?
Parents have priority over other individuals
64
What is the third tie-breaker for determining who can claim a dependent?
The exemption goes to whoever has the highest AGI
65
What are the 2 stipulations for a multiple support agreement?
Each eligible taxpayer must agree in writing
The person receiving the exemption must provide over 10% of the dependent's support
66
What is the amount of the child credit?
$1,000
67
What are the 2 criteria for a child to qualify for a child credit?
Must be a qualifying child
Must be under age 17
68
What is the AGI threshold for the child credit if the taxpayer is Married Filing Jointly?
$110,000
69
What is the AGI threshold for the child credit if the taxpayer is Single?
$75,000
70
What is the AGI threshold for the child credit if the taxpayer is Married Filing Separately?
$55,000
71
How much is a child credit reduced by once the taxpayer's AGI reaches the threshold?
$50 for every $1,000 (or fraction thereof) by which AGI exceeds the threshold
72
What are the 2 requirements to file a joint return?
Must be legally married the last day of the year
Must have the same tax year-end
73
What type of return should a surviving spouse file in the year of death?
A joint return
74
Which years following a death can a surviving spouse file as such?
The second and third year (the first year they file jointly)
75
What are the 4 requirements for filing as a surviving spouse?
Cannot be remarried the last day of the tax year
Must qualify for joint return in the year of death
Must have at least 1 son/daughter living at home the entire year
Taxpayer must pay over half the expenses of the home
76
What are the 3 requirements for filing as Head of Household?
Must be unmarried last day of tax year
Cannot be a surviving spouse
Must pay over half the cost of maintaining a household where a dependent lives over half the tax year
77
What is the tax filing status of an abandoned spouse?
Head of Household
78
What are the 2 requirements to be an abandoned spouse?
Must have lived apart from spouse last 6 months of the year
Must pay over half the cost of maintaining a household with a dependent son/daughter living over half the year
79
In what situation can a taxpayer file as Head of Household, even when he or she doesn't live with any dependents?
When the taxpayer maintains a separate household for a dependent parent
80
When would a person's filing status be single?
If they are unmarried and don't qualify for surviving spouse or head of household
81
Why would a couple file Married Filing Separate?
If there is marital discord and one spouse does not want to be liable for the other spouse's actions
82
When does kiddie tax apply to a child 17 year old or younger?
If the child has over $2,000 in unearned income
83
When does kiddie tax apply to an 18 year old child?
If the child has over $2,000 in unearned income and the child's earned income is less than half of his/her support
84
When does kiddie tax apply to a 19-23 year old?
If the child is a full-time student, has over $2,000 in unearned income and the child's earned income is less than half of his/her support
85
How is a child's net unearned income computed in regard to the kiddie tax?
Unearned income
Less: Statutory deduction of $1,000
Less: Greater of:
A) Greater of $1,000 or earned income plus $350 (up to $6,100)
B) Itemized deductions related to unearned income
86
How is a child's taxable income computed in regard to the kiddie tax?
In the standard way (using the tax formula)
87
How is a child's total tax computed in regard to the kiddie tax?
Net unearned income x parents' marginal tax rate
| Plus: (Taxable income - net unearned income) x child's tax rate
88
Under the cash method, when is income taxable?
When it is received (or constructively received)
89
Under the accrual method, when is income taxable?
When it is earned
90
When is income considered to be earned?
When all events have occurred that fix the right to receive the income and the amount can be reasonably determined
91
When is prepaid income taxable under the accrual system?
In the year of receipt (earned or not)
92
When may a taxpayer under the accrual system defer prepaid income in connection with the sale of goods?
If the goods are not on hand, the amount received is less than the cost of the item, and the income is deferred for financial accounting purposes
93
When may a taxpayer under the accrual system defer prepaid income in connection with the sale of services?
If services are to be rendered before the end of the next tax year
94
How long can prepaid income be deferred if criteria for this exception are met?
Only to the next tax year
95
Is a check received after banking hours constructively received?
Yes
96
Is interest credited to a savings account constructively received?
Yes
97
Are mature bond interest coupons, which have not yet been redeemed, constructively received?
Yes
98
If salary is made available to an employee, but the employee does not take the salary, is it constructively received?
Yes
99
If a paycheck has been mailed to an employee, and the employee hasn't received it yet, is it constructively received?
No
100
Is a postdated check constructively received?
No
101
What types of bonds pay tax-exempt interest?
Obligations of states, territories, and US possessions and political subdivisions, school districts, port authorities, toll road commissions, counties, fire districts, private universities, hospitals, churches
102
When is the interest on a Series EE Savings Bond taxed?
When the bond is cashed
103
Are rental security deposits considered taxable income?
No (unless not refunded to tenant)
104
If a tenant makes improvements to a property, under what condition would this be taxable to the landlord?
If there was a reduction in rent for the improvements
105
What are dividends?
Distributions from earnings and profits
106
Qualified dividends have the same preferential rates as what?
Capital gains
107
What are 2 examples of constructive dividends?
When compensation for a business owner is above a reasonable amount
When a business owner charges rent to the business which is above a reasonable amount
108
If certain business expenses are found to be constructive dividends, how will this change the business' financial records?
Receivables (such as "due to owner") or expenses (such as compensation) will decrease, Dividends will increase
109
How must alimony be paid?
In cash, not property
110
What happens to the basis of property in a property settlement after a divorce?
Nothing. The original basis is maintained.
111
What are the tax consequences for a property settlement after a divorce?
None
112
What are the tax consequences of alimony?
Taxable to spouse who receives it, deductible by the spouse who gives it
113
When does recapture come into play with alimony?
When alimony drops by over $15,000 in the second or third year
114
If there is alimony recaptured, when is it put into effect?
In year 3
115
How is the recapture amount of alimony calculated?
Alimony paid in year 1
Minus: $15,000 (allowable reduction)
Minus: the average alimony paid in years 2 & 3
116
When the recaptured amount of alimony is calculated, what are the effects on the payor and payee?
The recaptured amount is added back into the payor's income, and subtracted from the payee's income
117
How is provisional income calculated (as it applies to social security benefits)?
AGI + tax-exempt interest + excluded foreign interest + 1/2 Social Security benefits
118
What is the maximum amount taxable social security benefits?
85%
119
When is a proceed or court award due to property destruction included in gross income?
Any amount that exceeds the adjusted basis is includable
120
When is a transaction a tax-free gift?
If the donor has donative intent
121
What are the 4 requirements that must be met for life insurance proceeds to be excluded from income?
If paid because of a death
If they do not exceed fair value
If they are received in a lump sum
If the beneficiary did not pay for the policy
122
When a life insurance policy is surrendered before death, what are the tax consequences?
The amount received over the premiums paid is taxable
123
If a life insurance policy is surrendered by a terminally ill person before death, what are the tax consequences?
None. The full amount is excluded
124
If a life insurance policy is surrendered by a chronically ill person before death in a lump sum, what are the tax consequences?
The amount received over the premiums paid is taxable
125
If a life insurance policy is surrendered by a chronically ill person before death in the form of annuity payments, what are the tax consequences?
The greater of $320 per day, or the actual cost of the person's care is excludable
126
What are the 3 requirements for a meritorious achievement award to be tax-free?
Cannot have entered a contest
Cannot be required to perform additional services
Award must be paid directly to a qualified charity
127
Which portion of a scholarship is tax-free?
The portion used for tuition, books, fees, supplies, and equipment
128
Which portion of a scholarship is taxable?
The portion used for room, board, and any other items not related to the cost of education
129
When are Qualified Tuition Program distributions taxable?
If the distributions are used for anything other than tuition, fees, books, supplies, equipment, room, and board
130
Is compensation for personal physical injury taxable?
No
131
Is a court award for "pain and suffering" taxable?
No
132
Are punitive damages taxable?
Yes
133
If medical/health insurance premiums are paid by an employer, are the amounts paid for the premiums taxable to the employee?
No
134
If medical/health insurance premiums are paid by an employer, are the benefits received by the employee taxable?
No
135
If disability insurance premiums are paid by an employer, are the amounts paid for the premiums taxable to the employee?
No
136
If disability insurance premiums are paid by an employer, are the benefits received by the employee taxable?
Yes
137
If life insurance premiums are paid by an employer, are the amounts paid for the premiums taxable to the employee?
Yes, unless group term life insurance
138
If life insurance premiums are paid by an employer, are the benefits received by the employee taxable?
No
139
If medical, disability, or life insurance premiums are paid by a taxpayer directly, are the benefits from those policies ever taxable?
No
140
What are the 7 fringe benefits excluded from income under Sec. 132?
```
No additional cost benefits
Qualified employee discounts
Working conditions benefits
De minimis benefits
Qualified transportation fringes
Recreation and athletic facilities
Educational assistance
```
141
Is compensation for business travel taxable to the employee?
No
142
What is the maximum amount of parking fringe benefits that can be excluded under Sec. 132?
$245 per month
143
What are the 5 requirements for an employee award to be a tax-free qualified plan award?
Must be given for safety or length of service
Must be given in property
Must be written
The average amount of all awards given cannot exceed a $400 value
The maximum award for 1 employee cannot exceed a $1600 value
144
What are the 3 requirements for an employee award to be a tax-free achievement award?
Must be given for safety or length of service
Must be given in property
Cannot be over a $400 value
145
What are the 3 requirements employer-paid meals and lodging to be excluded from an employee's income?
Must be on premises
Must be for the convenience of the employer
Must be required by the employer
146
If an employee an employee's income is put in a flexible spending account, is it taxable?
No
147
What are the 4 situations in which debt relief can be excluded from income?
Bankruptcy or insolvency
Student loan forgiveness for public service
Loan forgiveness on principal residence
Motivated by love/affective
148
In general, what is the recipient's basis when property is received as a gift?
The same as the donor's
149
If a gift is given with a built-in loss (FMV < Donor's basis), what is the recipient's basis?
There's a dual basis:
If the property is sold at a gain, the donor's basis is used
If the property is sold at a loss, the FMV is used
150
If property is inherited, what is the recipient's basis?
The FMV on the date of death
151
What kind of asset is inherited property? (Long-term or short-term)
Long-term
152
In general, what is a property's basis when it is converted from personal to business use?
The FMV on the date of conversion
153
If property is converted from personal to business use with a built-in loss (FMV < adjusted basis), what is its new basis?
There's a dual basis:
If the property is sold at a gain, the original adjusted basis is used (minus depreciation)
If the property is sold at a loss, the FMV is used (minus depreciation)
154
How is basis allocated when more than 1 asset is acquired in a single person (ex: land and building)?
The basis is apportioned relative to the FMV of the assets
155
Why would a person be inclined to give a building a larger portion of the basis than land when both are purchased together?
There is no depreciation allowed for land
156
What are the 5 items that are NOT capital assets?
```
Inventory
Property used in business
Accounts/notes receivable
Supplies
Copyrights/literary works/etc.
```
157
For what 2 purposes are capital assets generally used?
Investment
| Personal use
158
What is the result if net short-term capital losses exceed net long-term capital gains?
An overall loss
159
What is the result if net short-term capital gains exceed net long-term capital losses?
A net capital gain (NCG)
160
What is the result if net long-term capital gains exceed net short-term capital losses?
A net capital gain (NCG)
161
What is the result if net long-term capital losses exceed net short-term capital gains?
An overall loss
162
What ordered should net long-term capital losses offset net long-term capital gains?
In the order most favorable to the taxpayer (28% group, then 25% group, then 20% group)
163
What are the 4 categories of long-term capital gains?
Collectibles gain
The non-excluded gain from the disposition of QSBS
Unrecaptured Sec. 1250 gain
ANCG (everything else)
164
What rate are collectibles gains taxed at?
28%
165
What rate is the non-excluded gain from the disposition of QSBS taxed at?
28%
166
What rate is unrecaptured Sec. 1250 gain taxed at?
25%
167
What rate are ANCG (adjusted net capital gains) taxed at, assuming the taxpayer is in the 39.6% bracket?
20%
168
What are the 2 requirements for a business to have stock considered "qualified small business stock"?
The business must be small
The business must be active
169
What is the requirement for a taxpayer to exclude 50% of the gains on their QSBS?
The stock must be held for at least 5 years
170
What is the maximum amount of QSBS gains that may be excluded?
50% of the greater of $10,000,000 or 10 times the AAB (aggregate adjusted basis)
171
What is the aggregate adjusted basis (AAB)?
If FMV exceeds the adjusted basis, then the AAB is FMV (otherwise it is the adjusted basis)
172
What is the maximum amount that capital losses may offset ordinary income?
$3,000 per year. The rest is carried over to the next year.
173
If a loss carryover consists of both short-term and long-term losses, which should be applied first?
Short-term losses
174
When does a holding period on an asset begin?
The day after acquisition
175
How long must an asset be held to be considered a long-term asset?
Over 1 year
176
What is the first step (of 5) to determining the tax consequence of a property transaction?
Determine the realized gain or loss
177
How is realized gain or loss calculated?
Amount realized minus the adjusted basis
178
How is the "amount realized" in a property transaction calculated?
Money + FMV of property + Debt Relief - Selling expenses
179
How is adjusted basis calculated?
Initial basis + capital additions - depreciation
180
What is the second step (of 5) to determining the tax consequence of a property transaction?
Determine the recognized gain or loss (remove anything excluded or deferred by loss)
181
What is the third step (of 5) to determining the tax consequence of a property transaction?
Determine the character of the property disposed of (Ordinary vs. Capital, Short-Term vs. Long-Term) and the applicable tax rate (ordinary, 28%, 25%, or 20%)
182
What is the fourth step (of 5) to determining the tax consequence of a property transaction?
Determine if any losses are limited through the netting process
183
What is the last step (of 5) to determining the tax consequence of a property transaction?
Determine the basis and holding period of any exchanges
