Ch 2: Calculate Tax, High Incomes

Question 0

2013 tax brackets?

Answer 0

7 tax brackets get progressively higher with income

10%, 15, 25, 28, 33, 35, 39.6%

Question 1

Individuals are required to use the tax table unless…

Answer 1

Income exceeds maximum income in table (currently $100K)

Question 2

5 filing statuses?

Answer 2

1 married filing jointly
2 surviving spouse
3 head of household
4 single
5 married filing separately

Question 3

Community property law

Answer 3

Allocates community income equally btw husband and

Wife regardless of which spouse earns the income

Question 4

Non community property states

Answer 4

Income belongs to spouse who produces income

Results in higher tax rates

Question 5

If congress adopted a truly proportional tax system, would it be necessary to have 4 different tax rate schedules?

Answer 5

No, all taxable income would be taxed at same rate

Question 6

Joint return requirements

Answer 6

1 legally married or common law marriage on last day of
Tax year

2 must have same tax year end (except in death)

3 both must be citizens or residents

Question 7

How do tax rates go up for married couples or go down?

Answer 7

Go up if both husband and wife make equal amounts of
High earnings

Go down if one spouse is a big earner and the other isn’t

Question 8

Surviving spouse

Answer 8

Can file this status for 2 years after the year the spouse dies

Question 9

4 Conditions to qualify as surviving spouse?

Answer 9

1 have not remarried in year where surviving spouse is
Claimed

2 be US citizen/resident

3 qualified to file joint return in year of death

4 have at least 1 son or daughter living at home during entire
Year and provide more than half their support

Question 10

2 Benefits of surviving spouse filing status?

Answer 10

1 Entitles tax payer to lower joint return tax rate schedule

2 a higher joint return standard deduction in year spouse died
can include spouse exemption

Question 11

4 Conditions to meet head of household filing status?

Answer 11

1 unmarried at end of tax year (exceptions apply to marriage
To nonresident aliens and abandoned spouses)
2 not be surviving spouse
3 be US citizen or resident
4 pay over half the costs of maintaining household where
Dependent lives for half the year

Question 12

An individual can’t claim head of household status in…

Answer 12

Year their spouse died

Question 13

2 exceptions to claim head of household?

Answer 13

1 in divorce, can claim head of household when qualifying
Child lives with tax payer more than half the year when child
Is not their dependent

2 can be head of household when maintain separate home
For parent

Question 14

7 charges included in maintaining the household?

Answer 14

1 property taxes
2 mortgage interest
3 rent
4 utility charges
5 upkeep and repairs
6 property insurance
7 food consumed in house

Question 15

7 common expenses not included in maintaining the house hold?

Answer 15

1 clothing
2 education
3 medical treatment
4 vacations
5 life insurance
6 transportation
7 value of services provided by tax payer

Question 16

Single tax payer definition?

Answer 16

Unmarried individual who does not qualify as surviving
spouse or head of house hold

Tax rates progress more rapidly

Question 17

Married filing separately

Answer 17

Married individuals that choose to file separate returns
Must use separate rate schedule

Leads to higher tax rates

Question 18

3 disadvantages of married filing separately?

Answer 18

1 taxpayer may lose all or part of benefits of deduction for
Individual retirement accounts
2 lose child care credit
3 lose earned income credit

Question 19

Abandoned spouse

Answer 19

Tax relief for otherwise paying married and separate

Question 20

Abandoned spouse 3 requirements?

Answer 20

1 Taxpayer lived apart from spouse for last 6 Months of year

2 taxpayer pays over half costs of maintaining house and
Has son/daughter living there for over half the year

3 taxpayer is US citizen or resident

Question 21

Under current law, what 3 rules curtail the advantages of shifting income to dependents?

Answer 21

1 dependents don’t receive personal exemption on own
returns
2 (2013) dependent’s standard deduction is reduced to
greater of $1,000 or dependent’s earned income + $350
3 tax on unearned income of child under age 18 (or 24)
Is figured by reference to parent’s tax rate if higher
Than child’s rate

Question 22

Unearned income

Answer 22

Dividends, interest, capital gains, rents, royalties

Question 23

When does the kiddie tax apply at age before and during age 18 and 19 to 23?

Answer 23

Before: kid tax applies if unearned income exceeds $2,000
18: if child provides less than half his support and kid tax applies if unearned income exceeds $2,000

19 to 23: if child is full time student, if child provides less than half his support and kid tax applies if unearned income exceeds $2,000

Question 24

How does earned income negate the kiddie tax?

Answer 24

When it is more than half the support the kiddie tax doesn't Apply

Question 25

Jane and Jill have 3 dependent teen age children. Jane operates a retail business and Bill farms. They have earned income of $200,000 each year. Can they use compensation paid to children as tax saving device?

Answer 25

Yes, assuming compensation paid to each child is less Than amount of standard deduction And parents provide over half their support

Question 26

What tax schedule do proprietors prepare returns on, farmers?

Answer 26

Schedule C = proprietors Schedule F = farmers

Question 27

C corporations

Answer 27

Regular corporations treated as separate entities for tax | purposes

Question 28

The corporate tax formula does not contain... 4 things

Answer 28

1 adjusted gross income figure 2 personal exemption 3 dependency exemption 4 standard deduction

Question 29

S corporations

Answer 29

Not treated as separate entities for tax purposes (flow through entities) S corporation share holders report respective shares Of s corporations income on individual returns

Question 30

2 main Requirements of S corporations?

Answer 30

1 no foreign share holders 2 report ordinary income and special items separately

Question 31

Tax formula for C corporations?

Answer 31

Income from whatever source derived Minus: exclusions Gross income Minus: deductions Taxable income Times: tax rates Gross tax Minus: credits and prepayments Net tax payable/refund due

Question 32

Partnerships

Answer 32

Flow through entities where partners report respective shares of partnerships income on tax returns Even if income isn't distributed

Question 33

Capital assets

Answer 33

``` Investment property (stocks, bonds) Personal use property (personal residence or automobile) ```

Question 34

New income tax provisions enacted on high income tax payers from affordable care act?

Answer 34

0. 9% payroll tax on earned income over $200,000 ($250k m.c.) 3. 8% tax on lesser of investment income (interest, dividends, capital gains) or AGI in excess of $200,000 (250k married coup.)

Question 35

Affordable care act 2013 effect on personal and dependency | Exemptions and itemized deductions

Answer 35

Personal and dependency exemptions phased out at 2 % For every $2,500 over AGI for single,( $1,250 married) Itemized deductions reduced up to 80%, reduced at rate Of 3% of AGI in excess above threshold

Question 36

The net unearned income of children under the age of 24 is...

Answer 36

Taxed at parents' tax rate Prevents upper income parents from minimizing family's Tax

Question 37

Assigned income

Answer 37

When someone has corporation pay dividend to someone else | They still pay taxes on that dividend

Question 38

Shifting income

Answer 38

Families can often reduce taxes by shifting income to | Other family members who are in lower tax brackets

Question 39

Splitting income

Answer 39

Consists of creating additional taxable entities, especially | Corporations to reduce individual's effective tax rate

Question 40

Maximizing itemized deductions

Answer 40

Timing expenditures properly can increase deductions

Question 41

In the innocent spouse provision, the innocent spouse is relieved of liability for tax on unreported income if... 3 things (can elect to... Under what circumstance) 1 of the things

Answer 41

1 amount is attributable to erroneous items of other spouse 2 innocent spouse was unaware of understatement of tax 3 innocent spouse elects relief within 2 years after IRS begins collection activities (when aware of understatement But not it's amount)

Question 42

Separate liability election

Answer 42

Separated, divorced, filing separately or widowed is can elect only Liable for portion of understatement attributable to him

Question 43

Time limit for changing to a joint/Ammended joint return

Answer 43

3 years

Question 44

3 situations where tax payers must file regardless of gross income above?

Answer 44

1 tax payers who receive advanced payments of earned Income credit 2 taxpayers with net self employment income of $400 3 taxpayers who can be claimed as a dependent who Have over $1,000 in unearned income or total income Over standard deduction

Question 45

Return due dates, individuals and corporations?

Answer 45

Individuals April 15th, ext. oct. 15th Corporations: March 15th, ext. Sept. 15th A due date that falls on Saturday,Sunday or holiday is Automatically extended to next business day

Question 46

Form 7004

Answer 46

Gives corporations a 6 month extension | Gives partnerships a 5 month extension

Question 47

Partnerships and corporations are required to file taxes even if they...

Answer 47

Don't have gross income

Question 48

Form 4868

Answer 48

Allows individuals to file six month extension

Question 49

Form 1040EZ

Answer 49

Available to single taxpayers and married filing jointly tax Payers Tax payers have taxable income of under $50,000 (from salaries and wages, no more than $1500 interest income and Claim no dependents

Question 50

Form 1040A

Answer 50

Available to taxpayers with more involved returns May deduct IRA contributions, may claim credits for withholding

Question 51

Individual taxpayers report information to the IRS based on...

Answer 51

Social security numbers

Question 52

EIN

Answer 52

Employer identification number

Question 53

Employer identification numbers

Answer 53

Used by corporations, other taxpayers, tax exempt entities

Question 54

Individuals who employ others use both...

Answer 54

Social security number and employer identification