General Taxation Info

Question 1

Cash Basis

Answer 1

Income is taxed when collected, expenses are deducted when paid

Ignore A/R

• Service Industries

Question 2

Accrual Basis

Answer 2

No individual wants to pay taxes on income not collected
BUT Anyone CAN Be

• Businesses with Inventory Sales of more than $26 million for the past 3 years

Anytime cash is received - it is taxable immediately, even if received in advanced (unless refundable) - example: landlords all money received is taxes

Question 3

Filing Status

Answer 3

Determines the tax rates to be used and standard deduction

Determined on last day of the year

Single
MFJ
MFS
HOH
Qualifying Widower (QW)

Question 4

Single

Answer 4

Includes Divorced Individuals and anyone who is legally separate (legal decree of separate maintence)

Question 5

Married Filing Joint

Answer 5

2 taxpayer that are married and file together

Question 6

Married Filing Seperately

Answer 6

2 taxpayers that are married but don’t file together

• 1 taxpayer is doing illegal things (the other doesn’t want to be included)
• about to get a divorce and not communicating

Disadvantages:
- if one spouse itemizes, the other must too
- neither spouse can claim earned income credit, child or dependent care credit, education or adoption credit
- deduction for net capital losses is $1500 per spouse

Question 7

Qualifying Widow/Widower

Answer 7

• Filing status is determined at the date of death
• Still files joint return for year
• 2 years they get QW if they have a child living in the house (the entire year) - which gives the same standard deduction as joint return and same tax rates on joint return
• if still dependents after 2 years - HOH

Question 8

Head of Household

Answer 8

Single Parent: at least half of the year (other parent will file single unless exactly 50% as well) - if they live together, only one can file head of household (who pays for a majority of the actual home expenses)

• abandoned spouse: lives without the spouse for 6 months
• widow when they can no longer file as surviving spouse

Question 9

Dependents

Answer 9

No deduction for personal or dependent exemption

Must meet ALL for dependent –
- Relationship Test: son/daughter, brother/sister, niece/nephew, stepchild, adopted child, foster child, step sibling or descendent of any of these.
- Residence Test: Same principal residence for more than half the year
- Age Test: Less than 19 at end of tax year or under 24 and full time student for at least 5 mos of the year, no age limit on disabled or autistic children
- Citizenship: must be US citizen or resident of US, Canada or Mexico
- not provided more than 50% of support

Qualifying Relative
- Residence: anyone who lives with the taxpayer for the entire tax year if taxpayer pays more than 50% of their support
- Citizenship: must be US citizen or resident of US, Canada or Mexico
- Gross Income: Less than $4150 - waived if child is under 19 or under 24 and full time student

JOINT RETURN TEST
- potential dependent not filing a joint return
- if they file joint return and pay tax, taxpayer cannot claim dependent as qualifying child or relative

MULTIPLE SUPPORT
- if no one person provides more than 50% of an individual’s support - the group can file multiple support agreement designating which person will claim the individual

Question 10

Taxable Distributions