Tax Lesson 2 Flashcards
Basic Tax Formula
Income-exclusions = gross
Gross-deductions = AGI
AGI-(larger of itemized or standard deduction)-any qbi x 20% deduction = taxable income
Tax on taxable income-tax credits(including Fed income tax withheld & other prepayments) = tax payment/refund due
Cash basis taxpayers recognize income
When received, credited, set apart, or made available to be taken into possession
Property & services included in income at FMV
Must be consistent with constructive receipt doctrine
Accrual basis taxpayers recognize income
When earned Most businesses Report in gross income on earliest of following dates: Payment received Income amount due to taxpayer Taxpayer earns income
Doctrine of constructive receipt
When income available to taxpayer without substantial limitations/restrictions, deemed to be constructively received & should be taxed
Taxable year __?
Fiscal year __?
Calendar year
12 month period, adequate records & form 1128 for IRS approval
Qualifying Widower with Qualified Child Filing Dtatus
2 years following the year in which taxpayer’s spouse died
Not remarried
Has child/stepchild claim as qualified
Child lived in home all year
Paid more than 1/2 cost of keeping up home
Taxpayers who are blind
Must file to receive additional standard deduction
Example Exam Question:
Bob & Barbara married & file joint return. Bob is 68. Barbara is 67. Barbara is legally blind. What is standard deduction?
A. $25900
B. $27300
C. $28700
D. $30100
D
Certain taxpayers not eligible for standard deduction
MFS when other spouse itemizes
Nonresident aliens
Individuals filing tax return for tax year of less than 12 months
A taxpayer who is claimed as a dependent will have limited standard deduction
Greater of:
$1150 OR
$400 + earned income (not exceeding normal standard deduction)
Qualifying Child for Head or Household, Earned Income Credit, Child Tax Credit, & Credit for Child & Dependent Care Expenses. Must meet 4 tests:
Relationship
Abode
Age
Support
Relationship Test
Child
Descendant of child
Sibling
Descendant of sibling
Abode Test
Live with taxpayer for more than half the year
*considered to occupy household during temporary absences due to illness, education, business, vacation, or military service
Age Test
Under age 19 or student under age 24 as of end of calendar year
Student = full time 5 months of year
Support Test
Qualifying child doesn’t provide more than 1/2 own support during the year
*scholarships not considered support
If more than 1 person eligible to claim dependent, tie-breaker rules:
Both parents: parent lived with longer
Both parents & child lives with each same amount: parent higher AGI
Only one is parent: parent
Neither is parent: higher AGI
Qualifying Relative must meet joint return test & citizenship/residency test as well as
Relationship test
Gross income test
Support test
Not a qualifying child test
Relationship Test
Child/descendent of child Sibling/descendent of sibling Ancestor Step parent Uncles/aunts In laws Any other individual who has had same place of a one & is member of taxpayer’s household (not married to taxpayer during year)
Gross Income Test
Less than personal exemption amount ($4400)
Support Test
Must provide more than half support
Income received by dependent does not count as support from dependent unless expensed for that purpose
Not a Qualifying Child Test
Cannot be qualifying child of any taxpayer for tax year
Joint Return Test
Married dependent must not file joint return with spouse unless filed only to claim refund for tax withheld, if neither spouse required to file return, and if no tax liability would exist for either taxpayer on separate returns
Citizenship or Residency Test
Must be citizen or national or US or resident or US, Canada, or Mexico during some part of year (doesn’t apply for adopted children)
Must pay quarterly estimates if both:
Expects to owe at least $1000 after withholding/credits
Expects withholding & credits to be less than smaller of:
90% tax shown on 2022 return or
100% tax shown on prior year’s return
Gross income includes
Both earned & unearned income whether or not it is taxable
Partnerships & S-Corps are pass through entities
Income from business passed through to owners tax returns
Trusts & estates generally taxable to beneficiary
If income not distributed, taxable to trust/estate
In community property states
1/2 of earnings considered owned by each spouse
Annuity Payment Taxation Exclusion Ratio
Exclusion Ratio = investment/expected total return
If die before end of term
Entitled to deduction from AGI in misc itemized deductions
Return of remaining capital
Once recovered full basis from annuity payments
Entire benefit received is taxable
Example Exam Question:
On April 30, Ava age 60 received distribution from qualified plan of $150000. Adjusted basis in plan of $500000. FMV of $625000. What is taxable amount of distribution?
A. Not taxable
B. $30000 taxable
C. $12000 taxable
D. $15000 taxable
B
Ratio of Return of Adjusted Basis
AB before withdrawal/FMV at withdrawal
Social Security
Up to 85% of SS benefits may be taxable
Based on MAGI
MAGI = AGI plus tax exempt interest, interest earned on savings bonds used for higher ed, amounts excluded from income for adoption assistance, amounts deducted for interest paid for ed loans, income earned in foreign country excluded from income
To calculate taxable portion of SS benefits,
MAGI + 1/2 SS benefits compared to hurdles
1st hurdle: $32000 MFJ, $25000
2nd hurdle: $44000 MFJ, $34000
If MAGI + 1/2 SS exceeds 1st hurdle only, taxable amount is lesser of:
50% SS benefits
50% (MAGI + .5SS Benefits - hurdle 1)
Example Exam Question:
Married & have $30k income. SS benefits of $20k. What amount included in taxable income?
A. $0
B. $4000
C. $10000
D. $20000
B
If MAGI + 1/2 SS exceeds 2nd hurdle, taxable amount is lesser of:
85% SS
85% (MAGI + .5SS Benefits - hurdle 2) + lesser of: $6000 MFJ/$4500 or taxable amount calculated under 50% formula
Example Exam Question:
Married. Income of $45000. SS of $20000. What amount must be included in taxable income?
A. $9350
B. $11500
C. $15350
D. $17009
C
Below Market Loans:
Require imputed interest
Loan $0-$10000: $0 imputed
Loan $10001-$100000: lesser of net investment income or interest calculated using AFR less interest calculated using stated rate of loan *if net investment income
Example Exam Question:
Aidan loans $11000 to sister. Why would interest not be imputed on this loan?
A. Because loan is less than amount of annual exclusion
B. Loans of $100k or less are exempt from both income tax & gift tax consequences
C. If unearned income of $500
D. If earned income less than $1000
C
Below market rate loans by corporation to shareholder treated as dividend
Payments to corporation treated as interest income