Individual Tax

Question 1

Individual Taxation

Answer 1

Gross Income
- (Adjustments)
= Adjusted Gross Income

• (Standard or Itemized Deductions)—Greater
• (Exemptions)
  = Taxable Income

x Tax Rate equals

= Federal Income Tax
- (Tax Credits)
+Other Taxes
-(Payments)

=Tax Due or Refund

Question 2

Adjustments

Answer 2

known as deductions to arrive at AG

Question 3

FILING STATUS

Answer 3

use the status as of December 31

except in case of a spouse’s death during the year

Question 4

Surviving spouse status

Answer 4

is only available for taxpayers who have a dependent child living with them for the entire year (Whole Year)

Question 5

Head of household status

Answer 5

More than half year

Question 6

widow/widower Status

Answer 6

May use Joint tax return standard deduction and rates (but not exemption for deceased spouse) of each for 2 taxable years following the death of spouse. (Whole Year)

Question 7

Phase-out of personal expemtions

Answer 7

Reduces by 2% for every $2,500
Joint/Surviving Spouse $305,050
HOH $276,650
Single $254,200
MFS $152,525

Question 8

Dependency Exemptions

Answer 8

Qualifying Child
C lose relative
A ge limit (under 19 or 24 for full-time college)
R esidency & filing requirements (live with taxpayer more
than half of yr)
E liminate gross income test (does not apply to qualifying
child)
S upport test changes (taxpayer support more than 50%))

Question 9

Dependency Exemptions

Answer 9

Qualifying Relative
S upport over 50% test
U nder a specific amt of taxable gross income test
Has to be less than exemption ($3,950)
Tax Free Income:
SS Check (low income levels)
Tax-exempt int income (State & Municipal)
Tax-Exempt scholarships
P recludes dependent filing a joint tax return test
O nly citizens US/Canada or Mexico) test
R elative test
or
T axpayer lives w/individual for WHOLE year test

Question 10

Old (age 65 or older)

Blind

Answer 10

increased in standard deduction NOT an additional exemption

Question 11

GROSS INCOME

Answer 11

Taxable = Income FMV, Basis = FMV
nontaxable = Income NONE, Basis = NBV

Question 12

Life insurance proceeds

Answer 12

Note interest income element of deferred payout is taxable.

Question 13

Meals and lodging

Answer 13

Not taxable if for the benefit of the employer and furnished on the employer’s premises. For lodging, must be a condition of employment.

Question 14

Interest income

Answer 14

State and local obligations are nontaxable. Federal obligations and interest on state and federal tax refunds are taxable.

Question 15

Interest income on Series EE bonds is

Answer 15

sometimes tax exempt if used for higher education

Question 16

Dividends

Answer 16

dividend tax rate = 15 percent on qualified dividends for 2014 for most taxpayers, tax-free distributions (watch cash option on stock dividend), life insurance dividends. A maximum rate of 20 percent is in effect for 2014 for high-income taxpayers.

Question 17

State tax refunds

Answer 17

Taxable only if itemized in prior year (1040EZ means standard deduction and nontaxable refund).

Question 18

Alimony income

Answer 18

Payments must:

• Have written agreement
• Be in Cash
• Cannot extend beyond death of payee-spouse
• Cannot be members of same household
• Must not be anything other than alimony
• The spouses may not file joint tax return

Income to the spouse receiving payments & deductible to arrive at AGI by the contributing spouse.

Question 19

Schedule C = Sole proprietor (self-employed)

Answer 19

• Meals and entertainment rule = 50 percent deductible
• Can deduct prepaid interest but must use the accrual method.
• Bad debts actually written off may be deducted but only if an accrual basis taxpayer.
• Nondeductible expenses = personal expenses, federal taxes, and salaries paid to sole proprietor.
• Self-employment taxes are not deductible on Schedule C; they are an adjustment to AGI (also see Schedule SE). -Net operating losses = 2/20

Question 20

Uniform capitalization rules

Answer 20

Capitalize direct materials, direct labor, and O/H; expense selling and research. Know types of items (e.g., produced for resale) that the rules will apply to.