Chapter 4: Individual Income Tax Overview, Exemptions and Filing Status

Question 0

What is adjusted gross income (AGI)?

Answer 0

Gross income less deductions for AGI. AGI is an important reference point that is often used in other calculations.

Question 1

What is taxable income?

Answer 1

The tax base for the individual income tax

Question 2

What is the all-inclusive income concept?

Answer 2

A definition of income that says that gross income means all income from whatever source derived

Question 3

What is gross income?

Answer 3

realized income reduced for any excluded or deferred income

Question 4

What is realized income?

Answer 4

Income generated in a transaction with a second party in which there is a measurable change in property rights between parties

Question 5

What are exclusions?

Answer 5

Realized income that is exempted from income taxation

Question 6

What are deferrals?

Answer 6

Realized income that will be taxed as income in a subsequent year

Question 7

What is character of income?

Answer 7

Determines the rate at which income will be taxed. Common income characters (or types of income) include tax-exempt, ordinary and capital

Question 8

What is the preferential tax rate?

Answer 8

Tax rates lower than the tax rate applied to ordinary income

Question 9

What are Preferentially taxed income?

Answer 9

Income taxed at a preferential rate such as long-term capital gains and qualified dividends

Question 10

What is legislative grace?

Answer 10

The concept that taxpayers receive certain tax benefits only because Congress writes laws that allow taxpayers to receive the tax benefits

Question 11

What are FOR AGI deductions?

Answer 11

Deductions that reduce AGI
These deductions tend to relate to business activities and certain investment activities
Because for AGI deductions decrease AGI, they increase the deductibility of from AGI deductions subject to AGI limitations

Question 12

What are FROM AGI deductions?

Answer 12

Deductions below the line. from AGI deductions or deductions subtracted from AGI to calculate taxable income
These deductions include itemized deductions, the standard deduction and exemptions

Question 13

What are itemized deductions?

Answer 13

Certain types of expenditures that Congress allows taxpayers to deduct as from AGI deductions

Question 14

What is standard deduction?

Answer 14

a fixed deduction offered in lieu of itemized deductions. The amount of the standard deduction depends on the taxpayer’s filing status.

Question 15

What is an exemption?

Answer 15

a fixed income tax deduction a taxpayer may claim for each person who qualifies as a dependent of the taxpayer. This includes the taxpayer (and spouse on a joint return) who does not qualify as a dependent of another. The cost of the exemption per person is 3900

Question 16

What is the personal exemption

Answer 16

a fixed deduction allowed for an individual taxpayer, and spouse if filing a joint return. The amount for 2013 is 3900.

Question 17

What are dependency exemptions?

Answer 17

a fixed deduction allowed for each individual who qualifies as a “dependent” of the taxpayer. Limit for 2013 is 3900 per dependent

Question 18

What is the alternative minimum tax (AMT)?

Answer 18

a tax on a broader tax base than the base for the regular tax. The additional tax paid when the tentative minimum tax exceeds the regular tax. The alternative minimum tax is designed to require taxpayers to pay some minimum level of tax even when they have low or no regular taxable income as a result of certain tax breaks in the tax code.

Question 19

What are self-employment taxes?

Answer 19

Social Security and Medicare taxes paid by the self-employed on a taxpayer’s net earnings from self-employment.

Question 20

What are tax credits?

Answer 20

Items that directly reduce a taxpayer’s tax liability

Question 21

What are withholdings>

Answer 21

Taxes collected and remitted to the government by an employer from an employee’s wages

Question 22

What are estimated tax payments?

Answer 22

quarterly tax payments that a taxpayer makes to the government if the tax withholding is insufficient to meet the taxpayer’s tax liability

Question 23

What is a dependent?

Answer 23

a person for whom a taxpayer may claim a dependency exemption. To qualify as a dependent a person must be a qualifying child or qualifying relative

Question 24

What is a qualifying relative?

Answer 24

an individual who meets a relationship, support, and gross income test may qualify to be a dependent of another taxpayer

Question 25

What are the four tests that must be satisfied for an individual to be a qualifying child?

Answer 25

Relationship test
Age test
Residence test
Support test

Question 26

What are the three tests that must be satisfied for a qualifying relative?

Answer 26

Relationship test
Support test
Gross income test

Question 27

What is the purpose of filing status?

Answer 27

Filing status determines whether a taxpayer must file a tax return, appropriate tax rate schedules, standard deduction amounts, and several deduction and credit limitation thresholds

Question 28

Who qualifies as abandoned spouse?

Answer 28

a married taxpayer who lives apart from his or her spouse for the last six months of the year and who maintains a household for a qualifying child