Vocabulary

Question 1

Progressive Tax Rate

Answer 1

Federal income tax uses progressive tax rates ranging from 10% to 37%

As a taxpayer’s income goes up, the last dollar of tax is taxed at the higher amount

Question 2

Income Tax Due

Answer 2

Based on (1) filing status and (2) taxible income

Question 3

Filing Status Options

Answer 3

(1) Unmarried: whether you were unmarried on last day of taxible year - Dec. 31
(2) Married Filing Jointly (and surviving spouses): each spouse jointly and severally liable for tax deductions, penalties, interest
(3) Married Filing Separately: each files own
(4) Head of Household: unmarried and providing over hald of the support for one or more dependants

Question 4

Formula for Taxible Income

Answer 4

Gross income - above the line deductions = adjusted gross income

Adjusted gross income - (either standard deduction or itemized deduction) - qualified business income deduction = taxible income

Then apply any credits.

Question 5

Credits

Answer 5

Wages withheld from paycheck over course of year; Earned income credit (if income levels low enough); Adoption assistance credits; Education credits

Question 6

Identifying the Proper Taxpayer

Answer 6

• Tax the income of the person who performed the services, not necessarily who receives the money (I work and have my employer pay the income to my son)
• Tax the income from the property to the owner of the property (I have tenants pay rent to my son)
• When a parent transfers income-producing investment assets to a minor child, the kiddie tax applies: the unearned income of the minor child will be taxes at the same rates applicable to trusts and estates

Question 7

Two Methods of Accounting When a Taxpayer has Income or Deduction

Answer 7

Cash method: usually used by individuals

Accrual method: usually used by businesses

Question 8

Cash Method

Answer 8

Income: when the payment is actually or constructively (set apart or otherwise made availeble) received

Deduction: When taxpayer has paid the amount in question

*focus on whe cash actually trades hands

Question 9

Accrual Method

Answer 9

Income: when all events have occured that fix the rights to payment and the amount can be determined with reasonable accuracy

Deduction: when all events have occured that fix the rights to payment and the amount can be determined with reasonable accuracy AND economic performance with respect to the liability has occured

*focus on rights and obligations

Question 10

Taxable Year

Answer 10

Calendar year: ends dec 31

Fiscal year: ends on last day of any ohter month

If a business uses fiscal year for accounting purposes, that is the year the use for tax

Individuals usually use calendar year

Taxable year cannot be changed without consent of IRS