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Taxation > Unit 3 > Flashcards

Unit 3 Flashcards

1
Q

IRA Deduction

A

-If either spouse participates in a defined benefit or contribution plan in the tax year, there’s a limit on IRA contributions.
-If neither spouse participates in such a plan, there’s no income limit, and the IRA contribution is fully deductible.

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2
Q

One-half of self-employment tax is what as far as determining gross income

A

Adjustment to gross income

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3
Q

Self-employed health insurance

A

-You can deduct 100% of your self-employed health insurance premiums.
-However, the deduction cannot exceed your self-employment income.
-Any leftover amount can be deducted as an itemized deduction.

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4
Q

Self-employed SEP, SIMPLE, and qualified plans

A

Contributions are deductible

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5
Q

Alimony Paid

A

deductible if initiated before 2019

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6
Q

Medical Expenses

A

-Medical expenses are deductible, but only those that exceed 7.5% of your Adjusted Gross Income (AGI).
-Long-term care (LTC) premiums are considered qualifying medical expenses for this deduction.

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7
Q

Taxes Paid

A

-You can deduct state, local, real estate, property, and excise taxes you’ve paid.
-If you choose not to deduct state and local income taxes, you can deduct sales tax instead.
-There’s a maximum deduction limit of $10,000 for all these taxes combined.

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8
Q

Mortgage/HELOC Interest Paid

A
  • For mortgages taken out before December 15, 2017, interest paid on the first and second homes is deductible up to a maximum of $1,000,000 in loan principal.
  • Interest on home equity loans (HELs) up to $100,000 is deductible if the loan was originated before December 15, 2017.
  • For mortgages taken out after December 14, 2017, the maximum deductible amount is $750,000, which includes both the mortgage and home equity loan, if the proceeds were used for acquisition purposes.
    -Interest expenses, like margin interest, used to generate investment income are deductible.
    However, the deduction is limited to the amount of the taxpayer’s “net investment income.”
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9
Q

Charitable Contributions

A
  • Charitable contributions are deductible, but there are limits based on your Adjusted Gross Income (AGI).
  • Remember, you can only deduct contributions if you itemize your deductions.
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10
Q

Casualty Losses

A
  • Casualty losses are deductible for each separate event.
  • You value the loss based on the lower of its Fair Market Value (FMV) or its basis.
  • Then, you subtract any reimbursements received, like insurance payouts.
  • After that, you deduct a special $100 deductible.
  • The total of all losses is then subject to a threshold of 10% of your Adjusted Gross Income (AGI).
    -As of 2018, you can only include casualty losses if the casualty is part of a Federally declared disaster zone.
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11
Q

Miscellaneous Deductions

A
  • There were historically two types of miscellaneous deductions:
    • The first type was subject to a threshold of 2% of your Adjusted Gross Income (AGI). However, starting in 2018, these expenses are no longer deductible.
    • The second type was not subject to the 2% threshold. These include:
      • Gambling losses (limited to winnings),
      • Impairment-related expenses for a handicapped taxpayer,
      • Federal estate tax paid on income in respect of a decedent (IRD), and
      • Unrecovered basis in an annuity contract due to a taxpayer’s death.
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12
Q

Qualified Business Income Deduction

A

allows eligible individuals to deduct up to 20% of their qualifying business income.

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13
Q

Taxable Income

A
  • Taxable income is what you have left after subtracting either your itemized deductions (or standard deduction) and the qualified business income deduction from your Adjusted Gross Income (AGI).
  • Your initial tax liability is calculated based on this taxable income.
  • This tax liability is then reduced by any eligible tax credits you may qualify for.
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14
Q

Kiddie Tax

A
  • The Kiddie Tax applies if specific conditions are met.
  • When it applies, unearned income in a child’s name is taxed at the parent’s tax rate instead of the child’s rate.
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15
Q

3 Situations Where Kiddie Tax Applies

A
  • For any child under 18, the Kiddie Tax applies if they have unearned income over $2,500.
  • For the tax year when a child turns 18, the Kiddie Tax applies if they have unearned income over $2,500 and their earned income is less than half of their support cost.
  • For children aged 19 to 23 who are full-time students, the Kiddie Tax applies if they have unearned income over $2,500 and their earned income is less than half of their support cost.
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16
Q

What is the Kiddie Tax for Any Child under 18?

A
  • For any child under 18, the Kiddie Tax applies if they have unearned income over $2,500.
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17
Q

What is the kiddie tax for the year when the child turns 18?

A

the Kiddie Tax applies if they have unearned income over $2,500 and their earned income is less than half of their support cost.

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18
Q

Kiddie tax for children 19-23 who are full-time students

A

the Kiddie Tax applies if they have unearned income over $2,500 and their earned income is less than half of their support cost.

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19
Q

What do you need to calculate for Kiddie Tax?

A

-How much of the unearned income will be taxed at the parent’s rate?
-What is the child’s tax liability?

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20
Q

What you need to know for Kiddie Tax

A
  • The child, being a dependent, doesn’t get a personal exemption.
  • They can still use the standard deduction.
  • Unearned income over $2,500 is taxed at the parent’s tax rate.
  • Their tax liability is the total of tax calculated using both the parent’s and the child’s rates.
  • If parents file separately, use the higher of their marginal tax rates.
  • If parents are divorced, use the marginal tax rate of the parent with longer custody during the tax year.
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21
Q

Self Employment Tax Scenario 1
(less than FICA base)

A
  • If the taxpayer’s net earnings from self-employment (SE) multiplied by 92.35% plus their W-2 wages are less than or equal to $160,200 (the FICA base), they calculate self-employment (SE) taxes.
  • They calculate SE taxes by multiplying their SE earnings by 92.35% and then by 15.3%.
  • The employer’s portion (7.65%) is deducted from their Adjusted Gross Income (AGI).

SE earnings × .9235 × .153 = SE Taxes due

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22
Q

Self Employment Tax Scenario 2
(greater than FICA base)

A
  • If the taxpayer’s net earnings from self-employment (SE) multiplied by 92.35% plus their W-2 wages are greater than $160,200, they calculate two types of taxes.
  • They calculate Medicare Tax by multiplying their SE earnings by 92.35% and then by 2.9%.
  • They calculate OASDI Tax by subtracting their W-2 wages from $160,200, then multiplying the result by 12.4%.
  • They add the Medicare Tax and OASDI Tax to get the total SE tax due.
  • The employer’s portion (7.65%) is deducted from their Adjusted Gross Income (AGI).
23
Q

Child Tax Credit

A
  • To claim the Child Tax Credit, the child must be under 17 years old as of December 31 and claimed as a dependent by the taxpayer.
  • A qualifying child can be the taxpayer’s child, grandchild, stepchild, or eligible foster child.
  • The credit amount per child decreases by $50 for every $1,000 or fraction thereof above the IRS threshold for the tax year.
  • The maximum credit per qualifying child is $2,000.
24
Q

Child and Dependent Care Credit

A
  • The Child and Dependent Care credit helps offset the cost of caring for dependents while the taxpayer works or looks for work.
  • The IRS sets limits on the qualifying expenses for one or more dependents.
  • Eligible expenses are capped at $3,000 for one dependent and $6,000 for two or more dependents.
  • The credit percentage varies based on the taxpayer’s Adjusted Gross Income (AGI), ranging from 20% to 35%.
  • Taxpayers with AGI of $15,000 or less receive the maximum credit percentage of 35%, while those with AGI over $43,000 receive a minimum of 20%. The percentage scales gradually in between these income levels.
25
Q

Child and Dependent Care Expense Cap

A

$3,000 for a single dependent
$6,000 for two or more eligible dependents.

26
Q

Adoption Credit

A
  • The Adoption Credit is available in the tax year when the adoption process is completed.
  • There are limits on Adjusted Gross Income (AGI) that can reduce or eliminate the credit entirely.
27
Q

Education Credits

A
  • There are two main education credits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LL).
  • These credits can be reduced or eliminated based on your income.
  • You can only claim one of these credits, not both, and they cannot be used for the same expenses paid from certain education savings plans like 529 plans or Coverdell plans.
28
Q

American Opportunity Tax Credit

A
  • The American Opportunity Tax Credit (AOTC) covers tuition, fees, and course materials like textbooks but not room and board.
  • It’s available for the first four years of postsecondary education for you, your spouse, or a dependent.
  • The credit is 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000, making the maximum credit $2,500.
  • The student must be enrolled at least half-time for one term to qualify.
29
Q

Lifetime Learning Credit

A
  • The Lifetime Learning credit can be used for any number of years.
  • It applies to various educational pursuits like graduate, undergraduate, or professional degree programs, as well as courses to enhance job skills.
  • The credit is 20% of qualifying expenses, just like the AOTC, up to $10,000 for the family.
  • So, the maximum credit you can get is $2,000.
30
Q

Low Income Housing Credit

A
  • The Low-Income Housing Credit doesn’t have an income limit.
  • However, the maximum credit you can get is based on an equivalent taxable income deduction of $25,000.
31
Q

Historic Rehabilitation Credit

A
  • The Historic Rehabilitation Credit has a phaseout range for AGI, from $200,000 to $250,000.
  • The maximum tax credit is based on an equivalent taxable income deduction of $25,000.
32
Q

Payment of Tax

A
  • Taxpayers must settle any extra tax owed by the return’s due date or arrange installment payments, incurring interest.
  • Extensions are solely for filing the tax return.
33
Q

Witholding

A

For most taxpayers, employers are required to make income withholdings from each paycheck.

34
Q

Estimated Payments

A
  • Taxpayers with income from various sources, including businesses and investments, make estimated payments.
  • To avoid penalties, taxpayers must withhold at least 90% of the current year’s total liability or 100% of last year’s liability.
  • For higher-income taxpayers, the withholding requirement is increased to 90% of the current year’s liability or 110% of last year’s liability.
35
Q

If neither spouse participates in a defined benefit or defined contribution plan is there any income limit or deduction limit?

A

there’s no income limit, and the IRA contribution is fully deductible.

36
Q

To avoid penalties, taxpayers must withhold what percent of liability?

A

withhold at least 90% of the current year’s total liability
or
100% of last year’s liability.

37
Q

For higher-income taxpayers, the withholding requirement is increased to what percent?

A

increased to 90% of the current year’s liability
or
110% of last year’s liability.

38
Q

Who would make estimated payments?

A

Taxpayers with income from various sources, including businesses and investments

39
Q

Thinking of America as large or big and strong is a good way to remember that the American Op Tax Credit is

A

$2,500 which is bigger than $2,000 for Lifetime Learning

40
Q

Llifetime Learning think of 20’s

A

$2000 for deduction and 20% expenses of max 10k

41
Q

Child and Dependent Care Credit income limits

A

-Taxpayers with AGI of $15,000 or less receive the maximum credit percentage of 35%

-those with AGI over $43,000 receive a minimum of 20%. The percentage scales gradually in between these income levels.

42
Q

Miscellaneous Deductions Not subject to 2% limit

A
  • Gambling losses (limited to winnings),
  • Impairment-related expenses for a handicapped taxpayer,
  • Federal estate tax paid on income in respect of a decedent (IRD), and
  • Unrecovered basis in an annuity contract due to a taxpayer’s death.
43
Q

American Opportunity Tax Credit think NO-ROOM

A

No room covered
Only tuition and related expenses

44
Q

Mortgage Interest Deduction post Dec 4 2017

A

-mortgages taken out after December 14, 2017, the maximum deductible amount is $750,000,

-includes both the mortgage and home equity loan, if the proceeds were used for acquisition purposes.

45
Q

Gift Tax Adjustment only applies when:

A

The FMV at the time of the gift is greater (>) than the donor’s basis,
AND
The donor paid gift taxes on the gifted property.

46
Q

Appreciation Factor (gift tax)

A

the increase in value divided by the taxable amount of the gift.

47
Q

Appreciation factor (gift tax)

A
  1. Calculate the appreciation factor: It’s the increase in value divided by the taxable amount of the gift.
  2. Multiply the gift taxes paid by the appreciation factor.
  3. Add this result to the donor’s basis.
  4. This total becomes the donee’s basis.
  5. Remember, appreciation is the FMV at the time of the gift minus the donor’s basis.
  6. The taxable amount of the gift is either the FMV or FMV minus the annual exclusion.
  7. Since the FMV at the time of gift is greater than the donor’s basis, the donee also takes over the donor’s holding period.
48
Q

Gift Appreciation basis

A

Remember, appreciation is the FMV at the time of the gift minus the donor’s basis.

49
Q

What do you do if the FMV at the time of gift is greater than the donee’s basis?

A

Since the FMV at the time of gift is greater than the donor’s basis, the donee also takes over the donor’s holding period.

50
Q

What is the taxable amount of the gift?

A

The taxable amount of the gift is either the FMV or FMV minus the annual exclusion.

51
Q

Is land depreciated?

A

No. Land is not depreciated (non-wasting asset) and therefore maintains its historical cost on the balance sheet.

52
Q

Depreciation and Amortization do what re: adjusted basis

A

reduce the adjusted basis, while any improvements to the asset will increase the adjusted basis

53
Q

Key difference between a repair and an improvement

A

an improvement will add life to the asset, while a repair only maintains the asset’s existing life.

54
Q

What happens with fees associated with acquisition of property to be used in a trade or business or held for income production

A

any fees associated with the acquisition (loan points, legal fees and other closing costs) will be added to the original basis and will be amortized.

Taxation (13 decks)

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