Individual Tax Chapters 2-3

  1. What is the Individual Income Tax Formula?
    • Income from whatever source derived
    • - Exclusions
    • Gross Income
    • -Deductions for AGI
    • AGI
    • -Deductions from AGI
    • Taxable Income
    • * Tax Rate
    • Gross Tax Liability
    • -Credits
    • -Prepayments
    • Tax Refund or Tax Liability
  2. What is a realization event?
    A time when income is realized - for example: If a house appreciates, the income is not realized until the seller sells the house.
  3. What are 4 examples of income that are excluded?
    • Life insurance proceeds
    • Scholarship money used for tuition
    • Receipt of a gift
    • Certain Fringe Benefits
  4. Is this a "for" or "from" AGI deduction?
    Schedule C Deductions

    What is a Schedule C all about?
    • For AGI
    • Sole Proprietorship Income
  5. Is this a "for" or "from" AGI deduction?
    Schedule E Deductions

    What is Schedule E regarding?
    • For AGI
    • Real Estate rental income
  6. Are certain moving expenses "for" or "from" AGI deductions?
    For AGI
  7. What is an IRA?

    Are deductions for IRA contributions "for" or "from" AGI?
    Individual Retirement Account

    For AGI
  8. Is the Student Loan Interest Deduction "for" or "from" AGI?
    "for" AGI
  9. Why is AGI an important number?
    AGI is used for many tax limitations, phaseouts, and other calculations.
  10. Are charitable contributions "for" or "from" AGI?
    From AGI (Itemized Deduction)
  11. Is the standard deduction "for" or "from" AGI?
    From AGI
  12. What is the standard deduction for 2013 for single filers?
  13. What is the standard deduction for married-filing jointly in 2013?
  14. What are personal and dependency exemptions for 2013?

    Are these "for" or "from" AGI?

    From AGI
  15. Why is our tax system called a "progressive" tax system?
    As the wherewithal to pay increases, the tax rate increases (Not necessarily because the system is politically progressive/liberal).
  16. Why does the IRS make employees pay taxes paycheck to paycheck?
    There are 2 reasons: 1) The IRS does not have to try as hard to collect taxes that way. 2) Citizens feel like the government is paying them (where in reality, the government is returning money it owes to citizens)
  17. What are the lowest and highest individual income tax rates in the U.S.?
    10% and 39.6%
  18. What are the preferential rates for individual income? What do preferential rates apply to?
    • 10%, 20%, 30%
    • These rates apply to qualified dividends and net longterm capital gains.
  19. What is the filing status of a single person who has no dependents, and whose spouse died 1 year ago?
  20. What is the filing status for a single woman with a 20-year old son living at home? Her son is not a full-time student.
  21. What are the filing options for a couple who wants to be joint and severally liable for taxes due?
    Married Filing Jointly
  22. What are the rules for "surviving spouse" filing status?
    Spouse died during either of the two taxable years immediately preceding this taxable year. For the taxable year of death, spouse can file married filing jointly.
  23. Until what age does the "kiddie tax" apply?
  24. How does the "kiddie tax" work?
    Any unearned income exceeding $2,000 will be taxed at the parents'  tax rate. The child is taxed at his/her own rate for earned income.
  25. Name the five different categories of filing status.
    • Single
    • Married Filing Jointly
    • Married Filing Separately
    • Head of Household
    • Surviving Spouse/Qualified Widower
  26. What are exclusions?
    Income that is not taxed at all. Income - Exclusions = Gross Income.
  27. What is "Income from whatever source derived?"
    Income from anywhere, period.
  28. What are deductions?
    Deductions are money that is reduced from Gross Income (and/or AGI) in order to arrive at Taxable Income. (GI - for AGI Deductions = AGI. AGI - from AGI Deductions = Taxable Income)
  29. Define Exemptions
    Exemptions are deducted on top of deductions. There is an exemption for each taxpayer and dependent.
  30. What are credits? Name one kind of credit.
    Credits are dollar-for-dollar deductions from tax liability.
  31. What is the difference between Gross Tax Liability and Net Tax Liability?
    Gross Tax Liability is the total amount of taxes owed by a taxpayer during a year (taxable income * tax rate). Net tax liability is gross tax liability LESS Credits and prepaid taxes.
  32. Why would a taxpayer generally prefer a deduction "for" AGI over a deduction "from" AGI?
    Deductions "for" AGI reduce AGI. Reducing AGI is good for the taxpayer because AGI determines many tax limitations, phaseouts, and other calculations.
  33. Why would a taxpayer generally prefer a $1,000 credit instead of a $1,000 deduction?
    Credits are dollar-for-dollar reductions from tax liability, whereas deductions reduce taxable income.
  34. What are the ordinary income tax brackets for the year 2013?
    10%, 15%, 25%, 28%, 33%, 35%, 39.6%
  35. Is an alimony deduction "for" or "from" AGI?
    For AGI
  36. What are the requirements for someone to qualify for the head of household filing status?
    The taxpayer must provide more than 1/2 the expenses for maintaining the household. The taxpayer must not be married, and must have a qualifying child (who is not married) or have a deductible parent at home.
  37. Elizabeth is not married. She lives on her own and supports herself. She has no children or other dependents. May Elizabeth file as head of household this year?
    No, because she has no dependents.
  38. Elizabeth is not married. She and her five-year-old son live together in an apartment for the entire year., and Elizabeth provides all the support for both of them. May Elizabeth file as head of household this year?
  39. Mario's spouse died this year. He has a daughter that lives with him and he provides all of her support. May Mario file as a surviving spouse this year? Next year?
    • Not this year - he may file married filing jointly/separately this year.
    • Next year and the year following he can file as surviving spouse.
  40. If spouses file jointly, are both spouses liable for any unpaid taxes? Explain the "innocent spouse exception."
    • Yes, both are joint and severally liable when filing jointly.
    • The innocent spouse exception provides that if there is an understatement of tax on a joint return, and the innocent person did not know (and had no reason to know) about the understatement, it is inequitable to hold the other individual liable. The innocent party must elect for the benefits of this "subsection" no later than 2 years after collection activities began.
  41. What is the benefit of filing as a surviving spouse?
    You get the married filing jointly tax benefit.
  42. Why shouldn't the government impose a flat-tax instead of a progressive tax?
    For the flat-tax, 50% of all Americans pay 0 tax on income. With the flat-tax, EVERYONE would have to pay 22% on taxes. There would be riots.
  43. When would a couple file jointly?
    In most cases. This is because married couples enjoy a lower tax rate than non-married couples.
  44. Why would a couple elect to file separately?
    • The couple may not want to be held jointly and severally liable.
    • One spouse may qualify for more itemized deductions if the AGI were lower.
Card Set
Individual Tax Chapters 2-3
Individual Tax Chapter 2