Ch 2: tax formula, deductions

Question 0

Tax formula for individuals

Answer 0

Income from whatever source derived
Minus: exclusions

Gross income
Minus: deductions for adjusted gross income

Adjusted gross income
Minus: deductions from adjusted gross income:
Greater of itemized deductions or standard deduction
Personal and dependency exemptions
Taxable income
Times: tax rates

Gross tax
Minus: credits and prepayments

Net tax payable or refund due

Question 1

AGI

Answer 1

Adjusted gross income

Question 2

Income

Answer 2

Includes bot taxable and non taxable income

Includes income from any source

Does not include return of capital

Question 3

Exclusion

Answer 3

Any item of income that tax law says is not taxable

Question 4

Gross income

Answer 4

Income reduced by exclusions

Question 5

Allowable deductions

Answer 5

Business and investment expenses

Personal expenses that are specifically provided for in the
IRC

Question 6

2 categories of deductions

Answer 6

1 Deductions for adjusted gross income

2 deductions from adjusted gross income

Question 7

Deductions for adjusted gross income

Answer 7

Expenses connected with trade or business

Question 8

Deductions from adjusted gross income

Answer 8

Personal expenses that congress has chosen to allow

Question 9

Adjusted Gross Income (AGI)

Answer 9

Measure of income that falls btw gross income and taxable
Income

Used for many tax computations, especially to impose
Limitations

Question 10

2 categories of deductions from adjusted gross income are?

Answer 10

1 itemized deductions or the standard deduction

2 personal and dependency exemptions

Question 11

Congress Specified personal expenses that can be deducted 2 examples

Answer 11

Charitable contributions and medical expenses

Question 12

Taxpayers are allowed to itemize expenses related to… 3 things

Answer 12

1 the production or collection of income

2 management of property held for production of income

3 determination, collection or refund of any tax

Question 13

Taxpayers have a choice of claiming either…

Answer 13

Itemized deductions or the standard deduction

Question 14

Standard deduction varies depending on… 3 things

Answer 14

1 taxpayers filing status

2 age

3 vision

Question 15

Personal exemption

Answer 15

Generally allowed for each tax payer, their spouse and

For each dependent

Question 16

Both personal and dependency exemptions are equal to what amount in 2013?

How is this amount adjusted in future years?

Answer 16

$3,900

Adjusted annually for increases in cost of living

Question 17

Taxable income

Answer 17

Adjusted gross income reduced by deductions from AGI

Amount of income that is tax

Question 18

Refundable tax credits, 8 items

Answer 18

1 withholding from wages and back-up withholding
2 estimated tax payments
3 excess social security taxes paid
4 earned income credit
5 regulated investment company credit
6 payments made with extension request
7 overpayment of prior year's tax
8 child credit

Question 19

Non refundable tax credits, 8 items

Answer 19

1 adoption expense credit
2 credit for elderly and disabled
3 foreign tax credit
4 child and dependent care credit
5 business energy credit
6 research and experimentation credit
7building rehabilitation credit
8 American opportunity lifetime learning credits

Question 20

Define tax credits, what do they include?

Answer 20

Amounts that can be subtracted from gross tax to arrive at
Next tax due or refund date

Include prepayments

Question 21

Refundable tax credits

Answer 21

Allowed to reduce taxpayer’s tax liability to zero and if

Credit remains are refunded by government to taxpayer

Question 22

Non refundable tax credits

Answer 22

Allowances that have been created by Congress for
Various social, economic and political reasons

Ex. Child and dependent care credits

Question 23

Itemized deductions, when are they claimed?

Answer 23

Claimed only if total of such expenses exceeds standard

Deduction

Question 24

Itemized deductions: 9 special itemized personal expenses

Answer 24

``` 1 medical expenses 2 taxes 3 investment and residual interest 4 charitable contributions 5 casualty and theft losses 6 employee expenses 7 production or collection of nonbusiness 8 management property held for income production 9 determination of tax or refund ```

Question 25

4 itemized deduction floors?

Answer 25

1 medical expenses 2 causality losses 3 miscellaneous itemized deductions 4 overall floor

Question 26

Itemized deduction floor: medical expenses

Answer 26

Only medical expenses in excess of 10% AGI are deductible In 2013 for taxpayers under age 65, 7.5% for over 65 through 2016

Question 27

Itemized deduction floors: Casualty losses

Answer 27

Only casualty losses in excess of 10% of AGI are deductible

Question 28

Itemized deduction floors: miscellaneous itemized deductions

Answer 28

Only miscellaneous itemized deductions in excess of 2% | Of AGI are deductible

Question 29

Itemized deduction floors: overall floor

Answer 29

Reduces total itemized deductions, only applies to high | Income tax payers

Question 30

Standard deduction

Answer 30

Amount set by congress varies year to year Depends on taxpayers filing status, age and vision

Question 31

IRC

Answer 31

Internal Revenue Code

Question 32

The standard deduction is unavailable to 3 categories of tax payers?

Answer 32

1 individual filing return in period of less than 12 months B/c change in accounting period 2 married tax payer filing separate return in instance where Other spouse itemizes 3 nonresident aliens

Question 33

Personal exemption, who is not allowed to use their personal exemption

Answer 33

Every taxpayer is allowed a personal exemption of $3,900 In 2013 Those claimed as dependents are not entitled to a personal Exemption

Question 34

To qualify as a dependent an individual must meet the definition of...

Answer 34

A qualifying child or qualifying relative

Question 35

4 requirements common to all dependents?

Answer 35

1 have qualifying identification # 2 meet citizenship test 3 meet separate return test 4 not themselves claim another person as a dependent

Question 36

Dependents that file tax returns may...

Answer 36

Not claim personal or dependency exemptions on their returns

Question 37

4 requirements for claiming w dependency exemption for a qualifying child?

Answer 37

1 relationship test 2 age test 3 abode test 4 support test

Question 38

Qualifying child dependency exemption: relationship test

Answer 38

Eligible children include biological, adopted, foster, | stepchildren, siblings and half siblings

Question 39

Qualifying children dependency exemption: age test

Answer 39

Under age 19, full time student under age 24, in school at least 5 months/yr.

Question 40

Qualifying child dependency exemption: abode test

Answer 40

Qualifying children must live in household of tax payer for 1/2 a year Dorms for students count

Question 41

Support test

Answer 41

Qualifying child may not provide more than half of his support

Question 42

Dependency exemption for qualifying relative 3 requirements

Answer 42

1 Relationship test 2 gross income test 3 support test

Question 43

Dependency exemption other relatives: relationship test Who does not meet the relationship test?

Answer 43

Related to tax payer (parents, in laws, step parents, siblings, Aunts/uncles, older children, niece/nephew) Or reside in taxpayer's household for entire year Cousins don't meet relationship test

Question 44

Other relatives dependency exemption: gross income test What sources of gross income are considered in this test?

Answer 44

Dependents gross income must be less than exemption amount for the year ($3,900 in 2013) Gross income considered: salary, taxable interest, rent

Question 45

What items are not considered in the gross income test?

Answer 45

Non taxable scholarships, tax exempt bond interest, | No taxable social security benefits

Question 46

Dependency exemption qualifying relative: support test What counts and doesn't count as support?

Answer 46

Taxpayer provides more than half the support Welfare and social security benefits count as support Scholarships don't count as support

Question 47

What counts as providing support? 8 common items

Answer 47

Amounts spent for food, clothing, shelter, medical care, | dental care, television, automobile and education

Question 48

3 tie breaker rules for tax payers to claim someone as a dependent?

Answer 48

1 qualifying child rules have priority over other relative rules 2 parents have priority over other individuals 3 if first 2 tiebreakers don't apply, exemption is rewarded to Taxpayer with highest AGI

Question 49

Multiple support declaration (Form 2120), eligibility?

Answer 49

enable taxpayer to claim dependency exemption in Situations where taxpayer doesn't provide over 1/2 support of dependent Eligible if contribute more than 10% of the support and Meet all requirements claiming dependency exemption Other eligible supporters must agree in writing who can Claim the exemptiom

Question 50

Release of Claim to Exemption for Child of Divorced or Separated Parents (Form 8332)

Answer 50

Enable noncustodial parent to claim an exemption

Question 51

Who gets a dependency exemption in a divorce?

Answer 51

The tax payer that has custody for greater part of the year Of child, unless specified by written agreement Ig share child equally, the parent with the higher AGI gets the exemption

Question 52

Child credit, threshold for joint, single, married filing separately

Answer 52

Individual taxpayers may claim a child credit of $1000 for (each parent gets $1000 per child) Each qualifying child (under age 17) Credit is reduced by $50 for every $1,000 the taxpayer's Adjusted gross income exceeds the threshold Thresholds: joint: $110,000, single: :$75,000, married Filing separate $55,000

Question 53

The child credit is refundable...

Answer 53

To 15% of taxpayers income in excess of $3,000 til 2017