Taxation Flashcards
Determining Tax Liability Formula
Gross Income - Above the Line Deductions = AGI
AGI - Standard or Itemized Deductions = Taxable Income
Taxable Income x Tax Rate = Tax Liability
Tax Liability - Tax Credits = Tax Due
Gross Income
All profits or income:
Compensation
Interest
Trust
Illegal
Annuities
Shareholder distributions
Gains from sales
Cancellation of Debt
Gross Income: Excludable Items
Life insurance
Inheritance
Gifts
Physical personal Injury damages
SS Benefits
Qualified Scholarships
Meals, lodging for employment
Above the Line Deductions
Ordinary business expenses
Qualified moving expenses
Net capital losses
Some pension plans & IRA contributions
AGI
Adjusted Gross Income: Gross Income - Above the line deductions
Standard Deduction
Single = $13,850
Married-joint = $27,700
Itemized Deductions
Below the Line
Mortgage Interest- 2 homes max
State, local & property taxes
Charitable gifts
Medical Expenses
Expenses incurred in production of income
Casualty loss from federally declared disaster
Education expenses needed for job or business
Meals, lodging on business
Charitable contributions
Taxable Income
AGI - Standard or Itemized Deduction
Tax Liability
Taxable Income x Tax Rate
Tax Due
Tax Liability - Tax Credits
State, local & property taxes
Capped at $10,000
Charitable Gifts
Charitable Contributions
Gifts: up to 60% of AGI- can hold over until the next year if more
Contributions: up to $600
* Must deduct any consideration given at fair market value
Medical Expenses
If greater than 7.5% of AGI
Alimony
Instruments executed before 2019- deductible
After 2019- nondeductible
No deductions for child support
Recognition Awards
Generally included as taxable income
May be excluded if:
1) award was in recognition of religious, literary, artistic, civic, educational, charitable, scientific achievement
2) selected without action from the recipient
3) recipient has no future obligations
4) award is turned over by payor upon recipient’s direction to charity or governmental organization
Education
- Scholarships: excluded from gross income
- Grants: excluded if primary purpose is to further education
- Employment Assistance: up to $5,250 is excludable
- Savings Account: up to $2,000- not tax deductible but income generated is
Cash Method
taxpayer reports items of income or deduction in year they are actually received or paid
Accrual Method:
Item of income is includible when
1) all events have occurred that fix the right to receive it
2) amount can be determined with reasonable accuracy
*Matches income and expenses in the same year
Vacation Homes
Entitled to deduct mortgage interest, taxes, and casualty losses
If owner/relative uses the house for more than 14 days or 10% of days rented-business deduction are limited to amount of income generated less mortgage & tax
Example: If use for 10 of 100= can deduct 90% plus mortgage interest & tax
If used for 25 out of 100= 75% plus mortgage interest & tax
Realization
Gains or losses at the time of sale of property
Example: Ben owns $5 stock, sells at $8= $3 realization at time of sale
