Chapter 4

Question 1

what is the individual income tax formula:

Answer 1

Income (all-inclusive)
- exclusions:
Gross Income
- “For AGI”:
AGI
- “From AGI”:
- QBI Deduction:
Taxable Income

Question 2

formula for income tax liability

Answer 2

Income Tax Liability
+ Other Taxes:
Total Tax Liability
- Tax Credits
- Tax Prepayments:
Tax Due OR Tax Refund

Question 3

what number do we use to calculate average and effective tax rate

Answer 3

total tax liability

Question 4

realized income

Answer 4

income generated in a transaction with a second party

Question 5

exclusion

Answer 5

realized income that Congress has permanently excluded from taxation

Question 6

deferral

Answer 6

realized income that is not taxed in the current year, but is subject to tax in future years

Question 7

5 main types of character income/losses

Answer 7

1. tax-exempt
2. tax-deferred
3. ordinary
4. capital income
5. qualified dividends

Question 8

ordinary income is taxed at:

Answer 8

the normal tax table rates

Question 9

capital income and qualified dividends are taxed at:

Answer 9

not taxed or taxed at a preferred rate

Question 10

capital income

Answer 10

gains and losses on the sale of capital assets

Question 11

capital assets are all assets except:

Answer 11

1. A/R from sale of goods and services
2. inventory and other assets held for sale in the ordinary course of business
3. assets used in trade or business

Question 12

generally, personal use assets are classified as:

Answer 12

capital assets

Question 13

3 categories for income, property, and expenses

Answer 13

1. Trade or Business (ToB)
2. Production of Income (POI)
3. Personal use

Question 14

“from AGI deductions” equals:

Answer 14

the greater of standard deductions or itemized deductions

Question 15

who qualifies for an additional standard deduction?

Answer 15

taxpayers 65 years or over or blind

Question 16

5 broad categories of from AGI deductions

Answer 16

• medical and dental expenses (the extent to which they exceed 7.5% of AGI)
• taxes
• interest expense
• gifts to charity
• gambling losses

Question 17

QC tiebreaking rules:
- QC to a parent and nonparent:
- QC to more than one parent:
- QC to more than one nonparent:

Answer 17

• the parent claims QC
• the parent with whom the child has resided for the longest period of time during the year
• the nonparent with the highest AGI

Question 18

Qualifying Widow(er) requirements:

Answer 18

• spouse died in either of the 2 years prior to tax return
• in their death year, you could file MFJ
• you paid more than half the cost of keeping up the home this year
• a dependent child or stepchild lived with you all year

Question 19

Head of Household requirements:

Answer 19

• not married
• paid more than half the cost of keeping up the home for the year
• have a “qualifying person”
  OR
• lived apart from spouse for the last 6 months
• file a separate return
• paid more than half the costs of keeping up the home
• home is main residence for child, stepchild, foster child for more than half the year
• claim the child as a dependent

Question 20

when can a taxpayer’s parent be a “qualifying person” for HoH?

Answer 20

when the taxpayer pays more than half the cost of maintaining their parent’s principal place of residence

Question 21

5 examples of “For AGI” deductions

Answer 21

• health insurance deduction for self-employed
• one-half of self-employment taxes
• business expenses
• rent and royalty expenses
• contributions to retirement accounts