Chapter 3 - The Tax Formula

Question 1

Who needs to file (6)?

Answer 1

If you meet any of these requirements:

1. Gross income >= standard deduction + old age addition. (Note, blindness deduction doesn’t apply to this calculation except with dependents).
2. Anyone who wants a refund.
3. Self-employed individuals who made $400 or more.
4. Married filing separately if Gross income >= $4150.
5. Dependents w/ unearned income >= $1050.
6. Received distribution from Health Savings Account (HSA).

Question 2

What are the types of filing status (5)?

Answer 2

1. Single
2. Head of household
3. Married filing jointly
4. Married filing separately
5. Surviving spouse (Qualifying widow, widower)

Question 3

Is filing status a choice?

Answer 3

No

Question 4

Filing status: Head of household rules?

Answer 4

Single person or abandoned spouse. Pays >= 1/2 the cost of maintaining the principal residence (lives there >= 1/2 the year) of qualifying dependent.

Question 5

Filing status: Surviving spouse rules?

Answer 5

Use married filing jointly rates. Must be married on date of death, not remarried by end of year. Can use for two more years if >= one child or stepchild.

Question 6

The Tax Formula for Individuals (12).

1. +
2. -
3. =
4. -
5. =
6. -
7. (-)
8. (-)
9. =
10. +, x
11. -
12. =

Answer 6

1. Income –Courts have defined income as any increase in wealth.
2. Less Exclusions:Items congress has specifically excluded from income.
3. Equals: Gross Income.
4. Less: For AGIDeductions.
5. Equals: Adjusted Gross Income “AGI”
6. Less: the greater of standard deduction or itemized deductions (From AGIDeductions)
7. Less: Personal and Dependency Exemptions(Suspended from 2018 to 2025 –TCJA)
8. Less: Deduction for qualified business income (Applies from 2018 to 2025 –TCJA)
9. Equals: Taxable Income
10. Tax on taxable income –Tax Liability
11. Less: credits, and pre-payments (withholdings or estimated tax payments)
12. Tax or Refund Due

Question 7

Define Income (step 1/12). List three exclusions (step 2/12). Income minus exclusions is (step 3/12)?

Answer 7

All income from whatever source derived. Any increase in wealth.

Exclusions

1. Unrealized gains/losses
2. Return of capital (Return of Capital Doctrine)
3. Receipt of borrowed funds

There’s more than just listed here.

Income minus exclusions is Gross Income

Question 8

List of Deductions FOR AGI (10), (step 4/12)

Answer 8

1. Trade of business expenses
2. Rent and royalty expenses
3. Capital loss deduction
4. Alimony paid
5. Retirement contributions
6. Qualified moving expenses
7. Unreimbursed employee business expenses
8. 50% of self-employment taxes
9. Self-employed medical insurance premiums
10. Interest on qualified student loans

Question 9

What is AGI (step 5/12)?

Answer 9

Total income subject to tax, minus specific things that shouldn’t be taxed.

Question 10

What are deductions FROM AGI (step 6/12)? When can standard deduction not be used (3)?

Answer 10

Greater of standard or itemized deduction.

Can’t use standard deduction when…

1. Married filing separately if a spouse itemizes.
2. Nonresident aliens.
3. Tax year less than 12 months because of change in account period for individual (idk).

Question 11

Things included in itemized deductions (4)?

Answer 11

1. Medical expenses.
2. Taxes up to $10,000.
3. Interest paid.
4. Charitable contributions.

Question 12

What is itemized deduction phase-out?

Answer 12

When income goes above a certain amount, itemized deductions start becoming worth less.

Question 13

Standard deduction rules for dependents (greater of what)?

Answer 13

$1050 or Earned income + $350 up to standard deduction for single individual.

Question 14

What are dependents important for in 2018 (now that step 7/12 has been suspended) (3)?

Answer 14

1. Child tax credit.
2. Dependent credit
3. Child and dependent care credit.

Question 15

Qualifying Child Tests - Age Test? (3 rules)

Answer 15

1. Under 19.
2. Full-time student under 24.
3. Permanently and totally disabled.

Note: Can’t be older than taxpayer

Question 16

Qualifying Child Tests - Support Test? (1 rule)

Answer 16

1. Must provide more than 50% of the child’s support.

Note: Doesn’t include scholarships.

Question 17

Qualifying Child Tests - Relationship Test? (3 rules)

Answer 17

1. All your children, including adopted, pending adoption, and foster children.
2. All siblings, including step and half-siblings.
3. Descendents of any of those.

Question 18

Qualifying Child Tests - Principal Residence Test? (1 rule)

Answer 18

1. Must live with taxpayer more than half the year.

Note: Includes temp absences, also look at divorce/separation agreement. Needs to be filed with IRS.

Question 19

Qualifying Child Tests - Citizenship/Residency Test? (2 rules)

Answer 19

1. Must be U.S. citizen or resident of U.S., Canada, or Mexico for part of the year.
2. Lives with the taxpayer in another country.

Question 20

Qualifying Child - Marriage rule?

Answer 20

Dependent can’t file a joint return with his or her spouse unless no tax owed or filing just for a refund of withholdings.

Question 21

Qualifying Child - Tiebreaker rules (3)?

Answer 21

1. Natural Parent
2. Who did child live with most number of days?
3. Person with highest AGI.

Note: More info in book.

Question 22

Qualifying Relative Tests - Relationship Test? (4)?

Answer 22

1. parents + grandparents and beyond (lineal ascendants)
2. Uncles and Aunts (collateral ascendants).
3. Certain in-laws (son, daughter, father, mother, brother, sister)
4. Someone that has lived with taxpayer all year.

Question 23

Qualifying Relative Tests - Gross Income Limit?

Answer 23

Can’t exceed the phased out exemption amount ($4050).

Question 24

Qualifying Relative Tests - Support Test?

Answer 24

Must have provided over 50% of actual support

Question 25

Qualifying Relative Tests - Citizenship/Residency Test?

Answer 25

Same as qualifying child.

Question 26

Tax Credits Lists (step 11/12) - Non-Refundable? (6)

Answer 26

1. Foreign Tax Credit 2. Child/Dependent care expenses. 3. Child tax credit 4. Retirement savings credit 5. Residential energy credit 6. Other credits from business activities

Question 27

Tax Credits Lists (step 11/12) - Refundable? (6)

Answer 27

1. Earned income credit 2. Additional child tax credit 3. American opportunity credit 4. Net premium tax credit 5. Fuel tax credit 6. Other refundable credits

Question 28

What counts as capital for capital gains?

Answer 28

Basically use your intuition on this one. Not property in businesses, copyrights, inventory items, receivables, etc. One-year rule: Less than a year - ordinary rates. More than a year - Capital gains rate - 20%, 15%, 0%.

Question 29

When does the Kiddie Tax Apply (4)?

Answer 29

1. One or both of child's parents alive 2. One or both in a higher tax bracket 3. Child doesn't file joint return with spouse 4. Child's net unearned income above a threshold ($2100 for 2018). Above amount is taxed.

Question 30

Kiddie Tax Age tests (3)?

Answer 30

Meet one. 1. Not >= 18 2. Not >=19 and has earned income <50% of support 3. Not >= 25 and is full-time student and has earned income <50% of support.

Question 31

Notes on Tax payments (step 12/12)?

Answer 31

1. Prior year overpayment credited 2. Federal income tax withheld on two forms, W-2 and 1099 3. Estimated tax payments made during the year (??).