Income Tax Fundamentals and Calculations

Question 1

Some examples of included in income

Answer 1

punitive damange awards

Unemployment

Severance pay

TAXABLE scholarships and grants

Question 2

Some examples excluded from gross income

Answer 2

Workers comp

Damanges for PHYSICAL INJURY (other than punitive)

Canclled debt because of BANKRUPTCY

Welfare payments

SSI

Gifts

Question 3

recognized vs realized income

Answer 3

• Recognized income is when it is reported on the tax return and including it in the calculation of income tax
• Realized income is income that has been earned and received for cash basis taxpayers
  
  • Examples of realized income includes the EXEMPT from gross income list that is NOT recognized for income tax purposes
  • Realized income is also dividends in tax-advantaged accounts but NOT recognized until distribution

Question 4

ISO holding period to not be taxable as wages (still taxed as capital gains)

Answer 4

Must be held 2 years from grant date and 1 year from exercise date

Question 5

Business deductions

Answer 5

• Deductions taken against business-related expenses gainst busines income (Schedule C, Schedule E, K-1, etc)
• For AGI
• 2021-2022 - business meals at restataunt are 100% deductible, then 50% again

Question 6

Capital losses

Answer 6

Above the line deduction

Question 7

Other above the line deductions

Answer 7

• Educator expenses (teachers)
• HSA contributions (don’t reduce FICA tax base if individual, does if through cafeteria plan)
• Moving expenses (military)
• Half of SE tax
• SE retirement plan contributions (SEP, SIMPLE, qualified)
  
  • SEP is limited to 20% of net income
• Self-employed health insurance premiums
• Tradiitonal IRA
• Student loan interest (2500 PER RETURN)
• Charity deduction up to 300$ if not itemizing

Question 8

Itemzied dedcution from AGI

Answer 8

• State/localt taxes, including property and income tax (limited to 10k for nonbusiness filers)
• Medical expenses greater than 7.5% of AGI (LTC included)
• Interest paid on mortgage debt (up to 750k)
• Qualifying charity donations
• Casualy and theft for FEDERAL DECLARED
• MISC subject to 2% AGI floor
  
  • Gambling losses
  • Estate tax paid on IRD
  • Unrecovered ivnestment in pension or annuity

Question 9

True marginal tax rate

Answer 9

Change in total tax liablity / change in taxable income

Question 10

NIIT

Answer 10

• Applies a speical tax rate to certain net investment income of indivdiuals, estates, and trusts that have income ABOVE the statutory threshhold amounts
• Will owe this if they have Net investment income AND MAGI over the thresholds for each filing status
• NIIT includes:
  
  • Interest, dividends, capital gains, rental and royalty income, nonqualified annuities, income from business involved in trading of financial instruments/commodities and business that are PASSIVE to the taxpayer
• Can be reduced by certain expenses allocalbe to the investmnet income

Question 11

Nonrefundable credits

Answer 11

• Chid and dependent care credit (qualifying child 12 or under or nonchild depednet who is incapable of self-care)
  
  • For expenses for taking care of child while working, school, etc
• Adoption tax credit
• Lifetime learning credit (per tax return)
• AOC (partially refundable, PER CHILD)

Question 12

Refundable credits

Answer 12

• Earned income credit (low-income)
• Child tax credit (qualifying child under 17)
• Premium tax credit (health insurance)