Unit 1 Income Tax Fundamentals and Calculations: Inclusions and Exclusions From Income

Question 1

What is the Basic Tax Formula?

Answer 1

Income
Less exclusions
equals Gross income

Less deductions
equals AGI (everything above is above the line)

Less the greater of itemized or standard deductions
equals taxable income

use taxpayer filing statues to compute tax
add any other taxes
subtract allowable credits
equals taxpayers liability

Question 2

Who can use IRS 1040 EZ?

Answer 2

Income solely from wages, salaries and tips.
less than $100,000 income
No adjustment to income are claimed

Question 3

Who can use a 1040A?

Answer 3

deductions for contribution to an IRA or Student loan interest.
deductions are not itemized.
only certain tax credits are claimed.

Question 4

Who must the standard longer 1040?

Answer 4

Those who do not qualify to use the 1040EZ and 1040A

Question 5

What are the 5 types of Filing status?

Answer 5

1. Single
2. Married filing jointly
3. Married filing separately (rarely advantageous)
4. Head of House hold (not married but has dependents)
5. Qualifying widower with dependent child (2 years subsequent to spouses death)

Question 6

Are individuals of an S corp considered self employed?

Answer 6

No

Question 7

What is the total self employment tax? What is the break down?

Answer 7

FICA 15.3% (OASDI 12.4%, Medicare 2.9%) an additional .09% is applied if certain income levels are met.

OASDI - Old Age, Survivors, and Disability Insurance, it also has a wage cap check your current tax tables.

Question 8

Gross income may include up to how much of social security benefits?

Answer 8

85%

Question 9

Income is not recognized unless received…what is the exceptions to that rule?

Answer 9

Imputed interest and Constructive receipt

Question 10

What are the imputed interest rules for below market rate loans?

Answer 10

Below market interest rate loans - between individuals.
Lender has interest income
Borrow has interest expense
The exceptions to these are
1. $10,000 or less no interest imputed
2. greater of $10,000 but less than $100,000, imputed interest cannot exceed the borrowers net investment income for the year
3. Net investment income less than $1000, no interest is imputed on loans of $100,000 or less.

Interested rate used equals the fed rate.

Question 11

What are the Imputed Interest rate rules for Compensation-related loans?

Answer 11

Employer makes a below market rate loan to an employee.
Lender - employer: interest income and compensation expense.
Borrower-employee: compensation income and interest expense.
Exceptions:
loans less than $10,000

Question 12

Do imputed interest rules apply if the purpose is tax avoidance or if the purpose of the loan is to affect the lenders or borrowers tax liability?

Answer 12

no that is considered tax avoidance

Question 13

What is Constructive Receipt?

Answer 13

Income is taxed as though it had actually been received. If no substantial limitation on taxpayers right to bring funds within the taxpayers control.

Question 14

What is the breakdown of FICA between employer and employee?

Answer 14

Employee: 6.2% OASDI, 1.45% Medicare and the .09 additional Medicare tax will apply if wage limits are reached.
Employer: Pays the other half except the .09 additional Medicare tax.
(OASDI - Old Age, Survivors, and Disability Insurance)

Question 15

What is a structured settlement?

Answer 15

Is a method of compensating a victim for injuries arising, in most cases, as a result of personal injury so as not to bankrupt a company or organization.

Question 16

How are compensatory damages taxed?

Answer 16

Makes the injured party whole, income tax free to the injured party.

Question 17

Are punitive damages taxed?

Answer 17

yes

Question 18

What are the categories of exclusion in the tax code, that are excluded from income?

Answer 18

1. Characterized by love, affection, or assistance.
2. Return of Capital
3. Make taxpayer whole
4. Socially desirable or a matter of legislative grace.
5. Benefits provided by employer (Fringe Benefits)

Question 19

What are the taxable consequences of this Fringe Benefit?

Employer paid premiums on accident and health insurance.

Answer 19

Excluded from employee income. must include excess benefits in income if discriminatory in favor of highly compensated employees.

Question 20

What are the taxable consequences of this Fringe Benefit?

Meals and lodging furnished by employee

Answer 20

exclusion for meals if on business premise for convince of employer, lodging if condition of employment.

Question 21

What are the taxable consequences of this Fringe Benefit?

Athletic facility provided to employees?

Answer 21

excluded if on business premise

Question 22

What are the taxable consequences of this Fringe Benefit?

Employer paid premiums on group term life insurance?

Answer 22

Premiums paid on coverage up to $50,000. Key employees include the greater of actual or table cost, no $50,000 exclusion.

Question 23

What are the taxable consequences of this Fringe Benefit?

child care and dependent care assistant.

Answer 23

up to $5000 a year and no exclusion for highly compensated employees is discriminatory.

Question 24

What are the taxable consequences of this Fringe Benefit?

auto

Answer 24

business use non taxable, personal use taxable

Question 25

What are the taxable consequences of this Fringe Benefit?

education assistance

Answer 25

up to $5250. no exclusion for HCE employees if plan is discriminatory.

Question 26

What are the taxable consequences of this Fringe Benefit?

no additional cost services

Answer 26

excluded as long as it is within current line of business. no exclusion for HCE employees if plan is discriminatory.

Question 27

What are the taxable consequences of this Fringe Benefit?

Qualified employee discounts.

Answer 27

Exclusion limited to gross profit on products and 20% of retail price on services. no exclusion for HCE employees if plan is discriminatory.

Question 28

What are the taxable consequences of this Fringe Benefit?

Working condition fringe benefit.

Answer 28

excluded if expenses otherwise deductible by employee

Question 29

What are the taxable consequences of this Fringe Benefit?

qualified transportation fringes

Answer 29

excluded with limit for transit and parking

Question 30

What are the taxable consequences of this Fringe Benefit?

De minimis fringes (tickets to a game a round of golf etc…)

Answer 30

excluded if occasional or immaterial

Question 31

What are the Adjustments (deductions) to gross income? to arrive at final AGI (above the line)?

Answer 31

1. Ordinary and necessary expenses in a trade or business. schedule C
2. Capital losses (if exceed the gains limit to $3,000)
3. Alimony if divorce was finalized before Dec. 31, 2018
4. Payments to Keogh plans, SEPs, SIMPLEs and IRAs.
5. Self employed health insurance deduction
6. Contribution to HSAs and Archer MSAs
7. Qualified tuition and related expenses
8. Student loan interest (up to $2500 and an AGI phase amount)