Tax Level 1- Individual Tax Flashcards
What are the 5 filing status?
Single
Married Filing Joint
Married Filing Separate
Head of Household
Surviving Spouse ( Qualified Widower)
When is marital status determined?
The IRS considers a taxpayer married (or unmarried) for the entire year based on marital status on the last day of the year.
Head of household
Must be custodial parent. A qualifying person must live with the taxpayer for more than half the year.
Must have a qualifying child or qualifying relative that is a member of the family.
Must pay more than half the cost of keeping up a home.
Must be unmarried or considered unmarried (file a separate return and spouse did not live in the home the last 6 months of the tax year).
A qualifying person can be a mother or father even if not living with the taxpayer if the taxpayer pays more than half the cost of maintaining the parent’s home (or the cost of a facility).
Qualifying Surviving Spouse (QSS
Must have a child or step-child (not a foster child) that can (or could if not for exception) be claimed as a dependent
Child must live with taxpayer all year, except for temporary absences
Taxpayer (and deceased spouse) must pay more than half the cost of maintaining home
Surviving spouse files jointly in year of death, then QSS for next 2 years
Tax rates and standard deduction same as joint return
Cannot use if remarried
Married Filing Separately
Benefits lost:
- Child and dependent care credit, most cases
- Earned income credit, generally, however, allowed for certain separated spouses
- Income exclusion and credit for adoption expenses, most cases
- Premium tax credit, most cases
- Education credits, student loan interest deduction
- US savings bonds used for education interest income exclusion
Benefits reduced to half allowed for joint:
- Child tax credit, Saver’s credit
- Capital loss deduction limit $1,500
- Standard deduction; if one spouse itemizes other spouse must itemize
- Income exclusion for employer’s dependent care assistance program
Due diligence penalty
For any failure relating to a return or claim for refund filed in 2023 (generally 2022 tax returns filed in 2023), penalty is $560 for each failure with no maximum penalty unless failure is due to reasonable cause and not willful neglect.
Custodial parent
The custodial parent is the parent with whom the child lived for the greater number of nights during the year. Only the custodial parent is entitled to claim the child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, the earned income credit, and the health coverage tax credit.
The custodial parent can file form 8332 allowing the noncustodial parent to claim the child for the child tax credit, additional child tax credit, and the credit for other dependents.
Multiple support agreement
Taxpayers can agree who claims dependent when a group provides more than half of the support.
The person claiming must provide more than 10% of the total support for the qualifying individual, and no other person can pay over half of the total support.
Each eligible person who pays over 10% of support must sign a statement agreeing not to claim the qualifying individual as a dependent.
The taxpayer will file Form 2120, Multiple Support Declaration with their tax return attesting to the agreement.
Tests for claiming dependents
To claim a person as a dependent must meet all three of the following tests:
Dependent Taxpayer Test – Taxpayer cannot qualify as a dependent of another person
Joint Return Test – Taxpayer cannot claim as a dependent a married person who files a joint return unless the married person files the return only as a claim for refund
Citizenship or Resident Test – Dependent must be a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico, for some part of the year
In general, a taxpayer cannot claim a person as a dependent unless they provide more than half of the total annual support and that person is a qualifying child or qualifying relative.
Qualifying child as dependent
To claim a child as a dependent, the child:
Must be a son, daughter, step-child, foster child, brother, sister, half-brother, half-sister, step-brother, step-sister, or a descendant of any of them.
Must be younger than the taxpayer (or spouse if filing jointly) and either under age 19, under age 24 and a full-time student, or any age if permanently and totally disabled (does not need to be younger than taxpayer).
Must live with taxpayer more than half of the year.
Must not provide over half of own support.
Qualifying relative as dependent
Person must not be a qualifying child of any taxpayer
Taxpayer must provide over half the person’s total support during the year
Person’s gross income must be less than $4,400 for 2022 ($ 4,700 in 2023)
Person must meet either Member of Household or Relationship Test:
Any person living with the taxpayer all year as a member of the household, or
One of these relatives: a child (step, foster, adopted, grand, or in-law), brother or sister (half, step, or in-law), father or mother (step or in-law, but not foster), aunt, uncle, niece, nephew, grandparent (or direct ancestors)
Situations where taxpayer is required to file a return
Net earnings from self-employment are $400 or more
Church wages are $108.28 or more (from a church that is FICA exempt)
The taxpayer (or spouse, if filing jointly) received HSA, Archer MSA, or Medicare Advantage MSA distributions
Advance payments of the premium tax credit were made for the taxpayer, spouse, or a dependent who enrolled in coverage through the Health Insurance Marketplace
The taxpayer owes special taxes (e.g. household employment taxes) or must recapture certain credits or taxes
Single dependent gross income threshold for filing return
A single dependent (who may be claimed by another taxpayer) must file a return if any of the following apply in 2022:
Unearned income more than $1,250
Earned income more than $13,850
Nonresident alien filing requirements
Files Form 1040 NR. Subject to U.S. income tax only on U.S. source income. Two tax rates apply:
30% on passive income such as interest, dividends, rents or royalties.
Graduated rates on effectively connected income (ECI) from the operation of a business in the U.S. or personal service income earned in the U.S. (such as wages or self-employment income).
Election to be taxed as U.S. resident
A nonresident alien can elect taxation as a U.S. resident for the whole year if all of the following apply:
Taxpayer is married
A spouse was a U.S. citizen or resident alien on the last day of the tax year
Taxpayer files a joint return for the year of the election using Form 1040
All worldwide income of a U.S. Resident is subject to U.S tax.
Resident alien filing requirements
Resident aliens must file a tax return following the same rules that apply to U.S. citizens. Files Form 1040 and all worldwide income is subject to U.S. tax. Must meet either the green card test or the substantial presence test.
Substantial presence test
A taxpayer is considered a U.S. resident if they meet the substantial presence test. A taxpayer meets this test for 2022 if they were physically present in the United States for at least:
31 days during 2022, and
183 days during the 3-year period that includes 2022, 2021, and 2020, counting:
All of the days present in 2022
1/3 of the days present in 2021
1/6 of the days present in 2020
NRA withholding
Most types of U.S. source income received by a foreign person are subject to U.S. tax at a rate of 30%. The withholding agent is personally liable for any tax required to be withheld.
Gross income
The total of earned and unearned income subject to tax. Gross income means all income you received in the form of money, goods, property, and services that isn’t exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it).
Gross income threshold for filing return
A taxpayer with gross income below the gross income threshold (based on filing status and age) is not required to file a return. Gross income threshold 2023:
Single $13,850
Head of Household $ 20,800
Married Filing Jointly $27,700
Qualifying Surviving Spouse $ 27,700
Married Filing Separately $5
Earned income
Earned income includes wages, salaries, tips, union strike benefits, long-term disability benefits received prior to minimum retirement age, net earnings from self-employment, and non-taxable combat pay (only if elected and included in taxable income).
Includes the amount of taxable scholarship or fellowship grant (only for purposes of filing requirements and the standard deduction).
For IRA contributions, taxable alimony from divorces finalized before 2019
Unearned income
Payments classified as income that are not considered earned, include unemployment compensation, taxable Social Security benefits, taxable pensions, annuity income, canceled debt, unearned income from a trust, taxable interest, dividends, capital gains, alimony, or pay received while in jail.
Accounting periods
A taxpayer will choose the type of accounting period (tax year) when they file their first income tax return.
Calendar year. 12 months ending on Dec 31.
Fiscal year. 12 months ending on the last day of any month except December.
Constructive receipt
Constructive receipt occurs when the income is available for a taxpayer’s unrestricted withdrawal. Physical possession is not a requirement.
Cash method
Most individual taxpayers use the cash method. Record income on constructive receipt and expenses when payment is made.
Accrual method
Record income when earned and expenses when accrued. The IRS considers the taxpayer to have earned income when all the events have occurred that fix the right to receive such income and the amount is reasonably determinable.
Tax identification number (TIN)
Everybody on the tax return, including dependents, needs a valid taxpayer identification number (TIN) issued by the due date of the return (including extensions). There is an exception for a child that is born and dies in the same year
A TIN is a Social Security number (SSN), an individual taxpayer identification number (ITIN), or an adoption taxpayer identification number (ATIN)
Earned Income Credit, Child Tax Credit, and Additional Child Tax Credit requires a valid SSN only
Under the American Rescue Plan Act of 2021, for 2021 and future years, if a qualifying child does not have a valid SSN, taxpayer may claim the earned income credit for individuals with no qualifying children.
Credit for Other Dependents and American Opportunity Credit requires a valid SSN, ITIN, or ATIN
Tip income
All tips (cash or FMV of property) are subject to federal income tax, SS, and Medicare.
A penalty equal to 50% of unpaid SS and Medicare taxes due on unreported tips.
Report cash and charge tips to the employer by the 10th of the following month if $20 or more.
Tips reported to the employer on time are considered income in month reported. Tips that are not reported on time are considered income in month actually received.
Report non-cash tips to IRS, not employer. No SS or Medicare on non-cash tips.
Group term life insurance
The cost of up to $50,000 of group term life insurance coverage provided by an employer is not included in income. The employee’s income shall include premiums paid by the employer for more than $50,000 of coverage.
Disability income
The amount received due to employer-paid plan premiums is taxable.
Sick pay
Pay received from an employer while sick or injured is part of salary or wages. Include sick pay benefits received from other sources in income if the employee did not pay premiums to receive the benefit.
Advance commissions
Include advance commissions or other amounts for future services as income in the year received.
Foreign income
U.S. citizens and resident aliens must report income from sources outside the United States (foreign income) on their tax return unless it is exempt by U.S. law.
Working for a foreign employer in the United States
Employees of an international organization or a foreign government in the United States are exempt from Social Security and Medicare employee taxes. However, such an employee must pay self-employment taxes on earnings from services performed in the United States, even though the employee is not self-employed.
Clergy Income - Subject to Federal Income Tax
Include – any salary and fees received for masses, marriages, baptisms, funerals, etc. (payments to the religious institution are not included).
Exclude – Rental value of home (including utilities) or housing allowance, up to the actual cost, is excludable (but must be included as earnings from self-employment).
Interest Income: Original Issue Discount
OID is the difference between the stated redemption price at maturity and the issue price.
Include a portion of the discount in income as it accrues.
OID rules do not apply to tax-exempt obligations, U.S. savings bonds, or if the maturity date is 1 year or less from issue date.
No need to report if the discount is less than one-fourth of 1% (.0025) of the redemption price at maturity multiplied by the number of full years from the date of original issue to maturity.
Ordinary vs. Qualified dividends
Ordinary dividends are taxed at ordinary income rates.
Qualified dividends are eligible for a lower tax rate than other ordinary income. Qualified dividends are subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain. To qualify for the lower maximum rate, the dividends must be paid by a U.S. corporation or a qualified foreign corporation, and the taxpayer must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Non-dividend distribution
When a corporation makes a distribution but does not have earnings it is a return of an investment in the stock of the company and reduces the basis of the stock. It is not taxable until the taxpayer fully recovers their cost basis.
Distributions in stock or stock rights
Generally not taxable unless if any of the following apply:
Shareholders have the choice to receive cash or other property.
Some shareholders receive cash or other property.
The distribution is in convertible preferred stock, resulting in a change of ownership.
Some Direct payments to the religious institution are not taxable.
The distribution is on preferred stock.
Reinvested dividends
Report dividends in income even if reinvested in stock through a dividend reinvestment plan instead of receiving the dividends in cash.
IRA/Retirement- Distributions due to death
The surviving spouse can rollover into own account. Other beneficiaries must withdraw balance over a specified period. Distributions are taxable to beneficiary as income in respect of a decedent.
Distribution of employer stock from qualified plan
If taxpayer distributes the entire account in a lump sum distribution and pays ordinary income tax on the stock basis (including employer matching), the capital gains rate applies to net unrealized appreciation (NUA) on the stock when it is later sold (regardless of actual holding period). The character of the gain on any further appreciation (above the NUA) after the distribution will depend on the actual holding period.
Annuities
No deduction for contributions to a non-qualified annuity (funded with after-tax dollars), but amounts within the annuity accumulate free of tax until withdrawn. The tax treatment of a non-qualified annuity depends upon factors such as basis and annuitization. Annuitization is the process of converting an annuity into a series of periodic payments.
TIP: An annuity in a qualified plan or IRA will receive the same tax treatment afforded to those plans.
