Ch. 4 - Individual Income Tax

Question 1

Taxable Income

Answer 1

is the tax base for the individual income tax.

Question 2

AGI = Adjusted Gross Income

Answer 2

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

Question 3

What is the form typically used for individuals to report their taxable income to the IRS?

Answer 3

Form 1040

Question 4

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. (E.g. appreciation in a stock investment would not represent realized income until the taxpayer sells the stock).

Question 5

Gross Income

Answer 5

realized income minus excluded and deferred income

Question 6

Tax laws are based on the _________

Answer 6

all-inclusive income concept, which is a definition of income that says that gross income means all income from whatever source derived.

Question 7

Exclusions

Answer 7

realized income items that taxpayers permanently exclude from taxation.

Question 8

Deferrals

Answer 8

realized income items that taxpayers include in gross income in a subsequent year.

Question 9

What is character of income?

Answer 9

Certain types of gross income are treated differently than other types of gross income for purposes of computing a taxpayers taxable income and income tax liability. For example, one type if income might be taxed in a different rate than another type of income.

Question 10

What are the most common types of character of income?

Answer 10

• Ordinary: This is income or loss that is taxed at the ordinary rates provided in the tax rate schedule, or that offsets income taxed at these rates, and is not capital in nature.
• Capital: These are gains or losses on the disposition or sale of capital assets. In general, capital assets are al assets other than:
   Accounts receivable from the sale of goods or services
   Inventory and other assets held for sale in the ordinary course of business
   Assets used in a trade or business, including supplies

Question 11

Ordinary Income

Answer 11

This is income or loss that is taxed at the ordinary rates provided in the tax rate schedule, or that offsets income taxed at these rates, and is not capital in nature.

Question 12

Capital

Answer 12

These are gains or losses on the disposition or sale of capital assets. In general, capital assets are al assets other than:
 Accounts receivable from the sale of goods or services
 Inventory and other assets held for sale in the ordinary course of business
 Assets used in a trade or business, including supplies

Question 13

Capital assets include what types of things?

Answer 13

include non-business assets such as personal use automobiles or personal residences and assets held for investment such as stocks and bonds.

Question 14

The tax consequences of recognized capital gains and losses for the year depend on….?

Answer 14

on how long the taxpayer has owned the capital assets before selling them and the outcome of a specific netting process

Question 15

The capital gain or loss from the sale of a particular capital asset is long-term when the taxpayer has owned the asset for more than _______ before selling, and short term when owned __________before selling.

Answer 15

more than a year; less than a year

Question 16

What are the excess of net long-term capital gain for the taxable year over net short-term capital loss for such year. Taxed at rates that are lower than ordinary rates.

Answer 16

Net capital gains

Question 17

Qualified dividends

Answer 17

shareholders receiving dividends from corporations include the dividend in gross income.

Question 18

Deductions

Answer 18

Amounts that are subtracted from gross income in calculating taxable income.
However, they are not necessarily easy to come by because, in contrast to the all-inclusive treatment of income, deductions are not allowed unless a specific tax law allows them.

Question 19

What is legislative grace?

Answer 19

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

Question 20

The tax law provide ______ distinct types of deductions in the individual tax formula: _______ and __________

Answer 20

2;
for AGI deductions and from AGI deductions

Question 21

What are deductions that are subtracted from gross income to determine AGI.

Answer 21

For AGI deductions

Question 22

From AGI deductions

Answer 22

deductions subtracted from AGI to calculate taxable income.

Question 23

The distinction between the deduction types (for/from AGI) is particularly important because…?

Answer 23

AGI is a reference point often used in determining the extent to which taxpayers are allowed to claim certain tax benefits.

Question 24

For AGI deductions tend to be associated with _________, and they ________ AGI

Answer 24

business activities and certain investment activities;
reduce

Question 25

What is another name for For AGI deductions or deductions subtracted from gross income to determine AGI.

Answer 25

Deductions above the line

Question 26

From AGI Deductions: commonly referred to as ____________ because ___________

Answer 26

deductions below the line; they are deducted after AGI has been determined.

Question 27

From AGI deductions include:

Answer 27

• Itemized deductions: certain types of expenditures that Congress allows taxpayers to deduct as from AGI deductions
• The standard deduction: a fixed deduction offered in lieu of itemed deductions. The amount of the standard deduction depends on the taxpayers filing status.
• The qualified business income (QBI) deduction (generally equal to 20% of a taxpayers QBI)

Question 28

Itemized deductions

Answer 28

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

Question 29

The standard deduction

Answer 29

a fixed deduction offered in lieu of itemed deductions. The amount of the standard deduction depends on the taxpayers filing status.

Question 30

The qualified business income (QBI) deduction

Answer 30

generally equal to 20% of a taxpayers QBI

Question 31

Taxpayers generally deduct the ________ of the standard deduction or itemized deductions.

Answer 31

higher

Question 32

Tax table

Answer 32

IRS-provided tables that specify the federal income tax liability for individuals with taxable income within a specific range. The tables differ by filing status and reflect tax rates that increase with taxable income.

Question 33

Tax rate schedule

Answer 33

a schedule of progressive tax rates and the income ranges to which the rates apply that taxpayers may use to compute their gross tax liability.

Question 34

In addition to the individual income tax, individuals may also be required to pay other taxes such as

Answer 34

Alternative minimum tax: a tax on a broader tax base than the base for the “regular” tax; the additional tax paid when the tentative minimum tax (based on the alternative minimum tax base) exceeds the regular tax (based on the regular tax base). 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.

Self-employment taxes: Social Security and Medicare taxes paid by the self-employed on a taxpayer’s net earnings from self-employment. For self-employed taxpayers, the terms “self-employment tax” and “FICA tax” are synonymous.

Question 35

Alternative minimum tax

Answer 35

Basically, when you make a lot of money but can deduct too much (because of charity, etc) so that your liability ends up being a small amount, then there’s theres the AMT tax code that adds back in a lot of what you were previously allowed to deduct so that you still owe a tax liability.

Aka a tax on a broader tax base than the base for the “regular” tax; the additional tax paid when the tentative minimum tax (based on the alternative minimum tax base) exceeds the regular tax (based on the regular tax base). 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 36

Self-employment taxes

Answer 36

Social Security and Medicare taxes paid by the self-employed on a taxpayer’s net earnings from self-employment. For self-employed taxpayers, the terms “self-employment tax” and “FICA tax” are synonymous.

Question 37

Tax credits

Answer 37

Tax credits reduce the amount of income tax you owe to the federal and state governments. Credits are generally designed to encourage or reward certain types of behavior that are considered beneficial to the economy, the environment or to further any other purpose the government deems important.
Ex: As an incentive for taxpayers to protect the environment, the federal government offers a credit for the cost of purchasing solar panels for use in your home.

Aka items that directly reduce a taxpayer’s tax liability. Like deductions, tax credits are specifically granted by Congress and are narrowly defined. Unlike deductions, which reduce taxable income, tax credits directly reduce taxes payable.

Question 38

Deductions reduce _____________; tax credits directly reduce _____________

Answer 38

taxable income; taxes payable

Question 39

After calculating their total tax and subtracting their available credits, taxpayers determine their taxes due (or tax refund) by subtracting _________ from the total tax remaining after credits.

Answer 39

tax prepayments;

Question 40

Tax prepayments include

Answer 40

1. Withholdings: taxes collected and remitted to the government by an employer from an employee’s wages. Also include wages from other sources of income (e.g. distributions from retirement plans, social security benefits distributions, and unemployment benefit payments).
2. Estimated tax payments: quarterly tax payments that a taxpayer makes to the government if the tax withholding is insufficient to meet the taxpayer’s tax liability.
3. Tax that the taxpayer overpaid in the prior-year that the taxpayer elects to apply as an estimated payment for the current tax year instead of receiving a refund

Question 41

Withholdings

Answer 41

taxes collected and remitted to the government by an employer from an employee’s wages. Also include wages from other sources of income (e.g. distributions from retirement plans, social security benefits distributions, and unemployment benefit payments).

Question 42

Estimated tax payments

Answer 42

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

Question 43

If __________ exceed the total tax after subtracting __________, the taxpayer receives a refund (or elects to apply the refund as an estimated tax payment) for the difference. If tax prepayments are less than the total tax after credits, the tax payer owes additional tax and potentially a penalty for the underpayment.al tax and potentially a penalty for the underpayment.

Answer 43

tax prepayments; credits

Question 44

True or false: taxpayers are allowed to claim a deduction for dependents

Answer 44

false; they are not

Question 45

What is it necessary to determine who qualifies as a dependent of the taxpayer?

Answer 45

for purposes of determining filing status, eligibility for certain tax credits, and other tax-related computations.

Question 46

To qualify as a dependent of another, an individual must meet which requirements?

Answer 46

1. Must be a citizens of the US or a resident of the US, Canada or Mexico
2. Must NOT file a joint return with their spouse unless there is no tax liability on the couples joint return and would not have been any tax liability on either spouses tax return if they had filled separately.
3. Must be considered either a qualifying child OR a qualifying relative of the taxpayer

Question 47

Qualifying child

Answer 47

an individual who qualifies as a dependent of a ­taxpayer by meeting a relationship, age, residence, and support test with respect to the taxpayer.

Question 48

Qualifying relative

Answer 48

an individual who is not a qualifying child of ­another taxpayer and who meets a relationship, support, and gross ­income test and thus qualifies to be a dependent of another taxpayer.

Question 49

Filing status

Answer 49

filing status places taxpayers into one of five categories (married filing jointly, married filing separately, qualifying widow or widower, head of household, and single) by marital status and family ­situation as of the end of the year. Filing status determines whether a taxpayer must file a tax return, appropriate tax rate schedules, standard deduction amounts, and certain deduction and credit limitation ­thresholds.

Question 50

Why is filing status important?

Answer 50

It determines:
-the applicable tax rate schedule for determining the taxpayers tax liability
-The taxpayers standard deduction amount
-The AGI threshhold for the reduction in certain tax benefits including certain tax credots and deductions

Question 51

Married filing jointly

Answer 51

one of five primary filing statuses. A taxpayer may file jointly if they are legally married as of the end of the year (or one spouse died during the year and the surviving spouse did not remarry) and both spouses agree to jointly file. Married couples filing joint returns combine their income and deductions and share joint and several liability for the resulting tax.

Question 52

Married Filing Separately

Answer 52

one of five primary filing statuses. When married couples file separately, each spouse reports the income they received during the year and the deductions they paid on a tax return separate from the other spouse.

Question 53

How many primary filing statuses are there, and what are they?

Answer 53

5
Married filing jointly
Married filing separately
Head of household
Qualifying widower
Single

Question 54

What is the primary objective of the married individuals treated as unmarried tax rule, and what is a common name for this type of situation?

Answer 54

is to provide tax relief to one spouse who has been abandoned by or separated from the other spouse and left to care for a dependent child.

Abandoned spouse

Question 55

Abandoned Spouse

Answer 55

a married taxpayer who lives apart from their spouse for the last six months of the year (excluding temporary absences), who files a tax return separate from their spouse, and who maintains a household for a qualifying child

Question 56

Qualifying Widow or Widower

Answer 56

one of five primary filing statuses. ­Applies for up to two years after the year in which the taxpayer’s spouse dies (the taxpayer files married filing jointly in the year of the spouse’s death) as long as the taxpayer remains unmarried and maintains a ­household for a dependent child. Also called surviving spouse status.

Question 57

Single Taxpayers

Answer 57

one of five primary filing statuses. A taxpayer files as single if they are unmarried as of the end of the year and does not qualify for any of the other filing statuses. A taxpayer is considered single if they are ­unmarried or legally separated from their spouse under a divorce or separate maintenance decree

Question 58

Head of Household

Answer 58

one of five primary filing statuses. A taxpayer may file as head of household if they are unmarried as of the end of the year and pays more than half of the cost to maintain a household for a qualifying person who lives with the taxpayer for more than half of the year; or they pay more than half the costs to maintain a household for a parent who qualifies as the taxpayer’s dependent.