Test 2 (Chapter 4-5)

Question 1

Realized vs Recognized

Answer 1

Realized: measurable change in property rights from transaction with another party
Recognized: all income, even non taxables

Question 2

Excluded vs Deferred

Answer 2

Excluded: never going to be taxed on it
Deferred: going to be taxed on it later

Question 3

Deductions for AGI

Answer 3

“above the line”

always prefer because these reduce taxable income dollar for dollar

Question 4

Deductions from AGI

Answer 4

“below the line”

• Choose greater of Standard Deduction or Itemized Deduction
• Plus personal and dependency exemptions

Question 5

Character of Income

Answer 5

tax exempt 
tax deferred 
ordinary 
qualified dividend
gain/loss

Question 6

Qualified Dividend

Answer 6

taxed at a preferential tax rate - “preferentially taxed income”

Question 7

Gain/Loss on Capital

Answer 7

assets other than accts receivable, inventory, assets used in trade or business
GAIN = long term- 15%, short term- ordinary
LOSS = for AGI deduction, max of $3000/yr, cannot deduct a personal use asset

Question 8

Credits vs Deductions

Answer 8

Credits: reduce tax liability dollar for dollar
Deductions: reduce AGI before finding tax needed to pay

Question 9

Witholdings

Answer 9

income tax withheld from salary by employer

Question 10

Dependency Requirements

Answer 10

1. citizen of US or resident of US, Canada, or Mexico
2. must not file a joint return with individual’s spouse, unless there is not a liability on the couple’s joint return and there would not be any tax liability if they had filed separately
3. must be considered either a qualifying child or relative

Question 11

Qualifying Child Tests

Answer 11

1. Relationship
2. Age
3. Residence.
4. Support

Question 12

Qualifying Child - Relationship Test

Answer 12

child or grandchild, sibling or niece/nephew

Question 13

Qualifying Child - Age Test

Answer 13

younger than taxpayer AND
under 19
OR
under 24 and a full-time student (at least 5 calendar months during the year)

Individual that is permanently and totally disabled is deemed to have met the age test

Question 14

Qualifying Child - Residence Test

Answer 14

must have same principal residence for more than half a year

time spent away because of illness, education, or special circumstance count as time spent at home

Question 15

Qualifying Child - Support Test

Answer 15

must not have provided more than 1/2 of his own support for the year

scholarships are excluded if you are the parent

Question 16

Qualifying Relative Tests

Answer 16

1. Relationship Test
2. Support Test
3. Gross Income Test

Question 17

Qualifying Relative - Relationship Test

Answer 17

descendant/ancestor of taxpayer
niece or nephew
sibling of taxpayer's mother/father
an in-law
any person who has the same principal house for entire year ("member of household")

Question 18

Qualifying Relative - Support Test

Answer 18

Taxpayer may more than 1/2 of qualifying relative’s living expenses

Question 19

Qualifying Relative - Gross Income Test

Answer 19

relative’s gross income for year < $3950 (exemption amount)

Question 20

Filing Status

Answer 20

1. Married Filing Jointly (MFJ)
2. Married Filing Separately (MFS)
3. Single
4. Head of Household
5. Qualifying Widow/Widower

Question 21

Married Filing Jointly (MFJ)

Answer 21

Must be married on the last day’s of the year

if one spouse dies during the year, you are still considered MFJ for that year

Question 22

Married Filing Separately (MFS)

Answer 22

Married but are filing separate returns

Avoids joint liability

Question 23

Qualifying Widow or Widower

Answer 23

Available for 2 yrs following the year of spouse’s death if taxpayer maintains household for dependent child

n/a if taxpayer gets remarried

Question 24

Single

Answer 24

Status of last resort

Unmarried taxpayers unless qualify for head of household

Question 25

Head of Household

Answer 25

Unmarried at the end of year (exception: married but abandoned spouse) Not a qualified widow or widower Pay more than 1/2 of costs for upkeeping home AND has a qualifying person (child or relative [as long as actually related]) live in house for more than 1/2 the year (exception: parents)

Question 26

Taxpayers recognize gross income when...

Answer 26

1. they receive an economic benefit 2. they realize the income 3. the tax law does not provide for exclusion or deferral

Question 27

Economic Benefit

Answer 27

Borrowed funds represent a liability, not gross income

Question 28

Realization Principle

Answer 28

transaction with another party that results in a measurable change in property rights

Question 29

Recognition

Answer 29

Realized income is assumed to be recognized absent of a deferral or exclusion provision

Question 30

Return of Capital Principle

Answer 30

Recognize appreciation/depreciation of assets after selling

Question 31

Tax Benefit Rule

Answer 31

refunds of expenditures deducted in a prior year are included in gross income to the extent that the refund reduced taxes in year of the deduction

Question 32

When to recognize income?

Answer 32

Individuals: file for calendar-year (usually cash) Corporations: file for fiscal year (dictated by method of accounting --> accrual by GAAP)

Question 33

Who recognizes income?

Answer 33

Assignment of Income --> fruit and tree

Question 34

NQO vs ISOs

Answer 34

Employee stock options NQO recognize income on date of exercise and date of sale ISO recognize income only on date of sale (ends up being the same amount)