Tax Part 2 Flashcards
What’s the Tax Formula?
Income from all sources - Exclusions = Gross Income
Gross Income - Deduction FOR AGI = AGI
AGI - Deduction FROM AGI (Std or ITM) + QBID = Taxable Income
Taxable Income X marginal tax rate = Gross Tax Due
Gross Tax Due - Tax Credits = Final Tax Due
Final Tax Due - Prepayments = Net Tax Due
What are the 6 Key Deducations FOR AGI?
- Pre-tax HSA Contributions
- 50% of SE Tax
- ?? of Contributions to SEP, SIMPLE and Qualified Retirement Plans
- Alimony payments for agreements till 2018 (Deduction for payor, Gross income for payee)
- 100% of health insurance premium ONLY if no other health insurance was available
- Traditional IRA Contributions ONLY if active participant and AGI within the phase out range
What are the Deductions FROM AGI?
STD - Based on filing status, age and blindness
ITM -
* Unreimbursed Medical and Dental Expenses (qualifying expenses exceeding 7.5% of AGI)
* Mortgage Interest paid on up to $750K of debt (Primary + Secondary homes)
* SALT Paid - State and Local Taxes (including property and sales tax) up to $10K annually
* Investment Income (limited to NII)
* Gifts to charity (limits apply)
* Casualty and Theft Losses (Federally declared losses only; Lesser of (FMV or Basis) - insurance PMTs - $100 deductible; Any losses above 10% of AGI are deductible)
What is an Exclusion from Income?
Sources of income that are non-taxable per US Tax code
What sourcres of income are excluded?
Interest & Gains:
* Muni Bond Interest
* Personal Residence Sale Gains ($250K / 500K ; need to meet owners test)
Income From Others:
* Alimony Payments (post 2019)
* Death benefits
* Inheritence & Gift
* Compensatory Damage Compensation
Education Benefits:
* Education Assistance Program (upto $5250)
* Scholarship
Benefits from Employer:
* Accident and health benefits: ER contributions
* Accident and health benefits: EE contributions?
* Fringe Benefits
* Meals & lodging expenses reimbursement
* Adoption Benefits (through ER program)
* Dependent Care Benefits (through ER Program)
?
On what Tax Form “above the line deductions” listed?
Schedule 1 (Part 2)
On what Tax Form “below the line deductions” listed?
Schedule A
What are two other names for “Deductions for AGI”?
Above the line deductions
?
Which type of deductions offer a more reliable tax savings opportunity and why?
Below the line deductions (Deductions FROM AGI) because these deductions reduce the AGI, leading to reduced taxable income which in turn leads to reduced gross tax due
Describe the specifics of HSA contribution deductions for AGI
What portion of the SE tax deductible for AGI?
50% of SE Tax is above the line deduction
What are the allowed deductions for Retirement account contributions for SE individuals and small business owners?
What type of retirement accounts qualify?
When are self-employed Health Insurance premimums deductible and upto what amount?
SE health insurance premiums are 100% deductible (above the line) ONLY if no other health insurance isn’t available through spouse
Under what requirements are traditional IRA contributions deductible?
One must be an active participant in employer sponsored retirement plan (distributed fortitures count as active participation)
One must have AGI within the phase out range per filing status
What are the two other names for “deduction from AGI”?
Above the line deductions ?
When should (and are required to) taxpayer itemized deductions?
When total itemized deductions are HIGHER than allowed standard deductions
When MFS, if one spouse itemizes, the other has to as well
What are the benefits of itemizing deductions?
On what criteria standard deduction amount depend on?
Filing Status
Age (65 and bove get extra deduction per taxpayor)
Blindness (extra deduction per each blind taxpayor)
What type of deductions reduce taxable income?
Below the line deductions / Deductions FROM AGI
Which type of tax payers have higher standard deductions?
Taxpayors 65 and bove
Taxpayors who are blind
Taxpayors who are 65 and bove AND Blind
What are the 3 potential above the line deductions sources for Self-Employed?
50% of SE Tax
100% of Health Insurance Premiums
??? of SEP, SIMPLE and Qualified Retirement Plan Contributions
How are alimony payments treated for income tax purposes for agreements that took effect before 2019?
Only applicable to seperation/divorce agreement signed pre-2019 (1/1/2019 and beyond)
**Pre-2019 **
Alimony paid = deductible to the payor
Alimoney received = gross income to the payee
How are alimony payments treated for income tax purposes for agreements that took effect after 2018?
Only applicable to seperation/divorce agreement signed post-2018 (1/1/2019 and beyond)
**Post-2018 **
* NO Deduction
* Alimony paid = NOT deductible to the payor
* Alimoney received = NOT gross income to the payee
What portion of the Employer contributions to HSA are tax-free distributions?
100%
All Eligible Distributions from HSAs are tax-free even if the employer has funded the HSA
What is a hobby vs business and what are the timeframes?
What is the phase out formula for determining Traditional IRA deductions?
[(Upper limit of the phase out range per filing status - AGI) / Phase out range) x Max deduction allowed]
Whend does a Constructive receipt occur?
Who can represent the taxpayer at an IRS audit?
What is the tax penalty for Negligence?
Deficiency of tax liability if there was no intent to defraud.
A 20% penalty will apply to the amount of the deficiency.
What is the tax penalty for Tax Fraud?
defraud, a 75% penalty will apply to the amount of the deficiency.
What is the tax penalty for Frivolous Return?
Penalty is $5,000.
What is the tax penalty for Failure to File?
- 5% of the unpaid taxes for each month or part of a month that a tax return is late up to a maximum of 25%.
- A minimum penalty of $510 is imposed if the tax return is later than 60 days.
What is the tax penalty for Failure to Pay?
0.5% per month the tax is unpaid up to a maximum of 25%.
Understatement of Liability
If the tax withheld from W-2 and/or estimated payments is less than:
* 90% of the current year liability, or
* 100% of the prior year liability (110% if taxpayers AGI was over $150,000-MFJ).
Penalty based on:
The amount of the underpayment,
The period when the underpayment was due and underpaid, and
The interest rate for underpayments that we publish quarterly.
What are applicable penalties to Tax Preparer?
- $60 per each failure of a tax preparer
Failure to
* furnish a copy to the taxpayer
* sign return
* furnish identifying number
* retain copy or list
* file correct information returns
* Be diligent in determining eligibility for certain tax benefits
To avoid underpayment penalty, how much estimated taxes do you pay?
90% of this years tax liability or 100% of last year’s tax liability
110% of last year’s tax liability (if AGI over $150K)
Which source describe intent of tax law changes?
Congressional committee reports
Sham transaction
transaction intended for tax avoidence
Substance over form
consider the whole situation and not just the individual transactions
