Taxation

Question 1

Determining Tax Liability Formula

Answer 1

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

Question 2

Gross Income

Answer 2

All profits or income:
Compensation
Interest
Trust
Illegal
Annuities
Shareholder distributions
Gains from sales
Cancellation of Debt

Question 3

Gross Income: Excludable Items

Answer 3

Life insurance
Inheritance
Gifts
Physical personal Injury damages
SS Benefits
Qualified Scholarships
Meals, lodging for employment

Question 4

Above the Line Deductions

Answer 4

Ordinary business expenses
Qualified moving expenses
Net capital losses
Some pension plans & IRA contributions

Question 5

AGI

Answer 5

Adjusted Gross Income: Gross Income - Above the line deductions

Question 6

Standard Deduction

Answer 6

Single = $13,850
Married-joint = $27,700

Question 7

Itemized Deductions

Answer 7

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

Question 8

Taxable Income

Answer 8

AGI - Standard or Itemized Deduction

Question 9

Tax Liability

Answer 9

Taxable Income x Tax Rate

Question 10

Tax Due

Answer 10

Tax Liability - Tax Credits

Question 11

State, local & property taxes

Answer 11

Capped at $10,000

Question 12

Charitable Gifts
Charitable Contributions

Answer 12

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

Question 13

Medical Expenses

Answer 13

If greater than 7.5% of AGI

Question 14

Alimony

Answer 14

Instruments executed before 2019- deductible
After 2019- nondeductible
No deductions for child support

Question 15

Recognition Awards

Answer 15

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

Question 16

Education

Answer 16

• 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

Question 17

Cash Method

Answer 17

taxpayer reports items of income or deduction in year they are actually received or paid

Question 18

Accrual Method:

Answer 18

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

Question 19

Vacation Homes

Answer 19

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

Question 19

Realization

Answer 19

Gains or losses at the time of sale of property
Example: Ben owns $5 stock, sells at $8= $3 realization at time of sale