Course 4 Module 3: Income Tax Calculations

Standard Deduction is an amount set by who?

Congress

For 2021, Jane had self-employment income of $100,000. Additionally, Jane worked part-time teaching at a local college and earned $40,000 of W-2 wages. Calculate Jane's self-employment tax. $16,830 $10,851 $10,597 $14,130

$14,130 First step is to determine if the SE earnings X 0.9235 plus the W-2 wages exceed $142,800 (2021). Because the result, $140,000, is less than the maximum Social Security wage base of $142,800, Jane's net earnings from self-employment, $92,350, is subject to 15.3% SE tax. ($100,000 x 0.9235 x 0.153 = $14,130.

A $3,000 deduction for a taxpayer in the 24% marginal tax bracket reduces taxes by __________. $3,000 $2,280 $240 $720

$720 A $3,000 deduction for a taxpayer in the 24% marginal tax bracket reduces taxes by $720. $3,000 (deduction) x 0.24 (marginal rate) = $720

If a taxpayer is in the 32% marginal tax bracket, (s)he would prefer ________________. $300 of tax deductions $100 of tax credits

$100 of tax credits The taxpayer would prefer the tax credits. The $300 of deductions will result in a tax savings of $96 ($300 x 0.32), whereas the $100 of credits will result in a tax savings of $100.

A surviving spouse must be each of the following EXCEPT: Able to claim at least one dependent child living at home the entire year and pay over half of the expenses of the home. Remarried at the end of the year in which the surviving spouse status is claimed. Qualified to file a joint return in the year of death. A US citizen or resident.

Remarried at the end of the year in which the surviving spouse status is claimed. A surviving spouse must not remarry as of the year end in which surviving spouse status is claimed to qualify for surviving spouse status.

Adjusted Gross Income is a measure of what?

Adjusted gross income (AGI) is a measure of income that falls between gross income and taxable income. AGI is important because it is used in numerous tax computations, especially to impose limitations. For example, AGI is used to establish floors for the medical deduction and casualty loss deduction and to establish a ceiling for the charitable contribution deduction.

Single Taxpayer

An unmarried individual who does not qualify as a surviving spouse or a head-of-household must file as a single taxpayer. The tax rates are higher than those that apply to other married taxpayers.

For 2021, David and Julie had a combined AGI of $114,000 and will be filing together as a married couple. They have a son, Mark, who is 12 years old. What is the amount of the child tax credit David and Julie are entitled to on their tax return? $3,000 $1,000 $1,600 $3,600

3,000 Because their AGI does not exceed $150,000, they received the full child tax credit of $3,000 for a child between the ages of 6 and 17 at the end of 2021.

If a taxpayer itemizes deductions, only medical expenses over ___ of AGI are deductible in 2022. 20% 12% 10% 7.5%

7.5% If a taxpayer itemizes, medical expenses over 7.5% of AGI are deductible.

The gross income test is waived for a child of the taxpayer who is either under the age of 19 A full-time student, under the age of 24. II only Both I and II I only Neither I nor II

Both I and II The gross income test is waived for a child of the taxpayer who is either under the age of 19 or, if a full-time student, under the age of 24.

Deductible Items

Congress allows taxpayers to itemize specified personal expenses. These specified expenses include medical expenses, taxes, investment and residential interest, charitable contributions, and casualty and theft losses (only for federally declared disaster area). In addition, taxpayers are allowed to itemize expenses related to the production or collection of non-business income, the management of property held for the production of income, and the determination, collection and refund of any tax.

Christopher is the 12-year-old son of James and Caroline. James and Caroline are divorced. Who decides who will claim a child tax credit for Christopher? Decided by James Decided by Caroline Decided by special rules set by Congress Decided by Social Security

Decided by special rules set by Congress In case of divorce or separation special rules determine which parent will receive child tax credits for children. Congress sets these rules. This is done to avoid disputes between the parents.

Deductions from Adjusted Gross Income

Deductions from adjusted gross income include any allowable deduction under itemized deductions or the standard deduction.

Tax Credit for the Elderly

A limited, personal, non-refundable credit is provided for certain low-income elderly individuals who have attained the age of 65 before the end of the tax year and individuals who retired because of a permanent and total disability and who receive insubstantial Social Security benefits. Most elderly taxpayers are ineligible for the credit because they receive Social Security benefits in excess of the ceiling limit or they have AGI amounts in excess of the limitations, which effectively reduce or eliminate the allowable tax credit.

Age Test

A qualifying child must be under age 19, a full-time student under age 24, or a permanently and totally disabled child. A child is considered to be a student if he or she is in full-time attendance at a qualified educational institution during at least five months of the year. To be full-time, a student must carry the number of hours or courses the educational institution requires a student to take to be considered full-time.

Abode Test

A qualifying child must have the same principal abode as the taxpayer for more than half of the year. A noncustodial parent meets this requirement if the custodial parent agrees in writing.

What does income NOT include? A return of capital. Gains in the sale of property. Non-taxable income.

A return of capital. Income included both taxable and non-taxable income. However, it does not include a return of capital.

Child support payments are categorized as ____________. gross income deductions exclusions exemptions An exclusion is a source of income that is omitted from the tax base, whereas a deduction is an expense that is subtracted in arriving at taxable income. Child support is categorized as an exclusion.

Exclusions An exclusion is a source of income that is omitted from the tax base, whereas a deduction is an expense that is subtracted in arriving at taxable income. Child support is categorized as an exclusion.

T or F: A limited credit is provided for all elderly individuals who have attained age 60 before the end of the tax year and individuals who receive insubstantial Social Security benefits.

F A limited, personal, nonrefundable credit is provided for certain low-income elderly individuals who have attained age 65 before the end of the tax year. It is also applicable to individuals who retired because of a permanent and total disability and who receive insubstantial Social Security benefits.

Simon, age 22, is a college student and is partially supported by his aunt and uncle. He also receives more than half of his support from his parents. Simon earned $16,000 from a summer job. His aunt and uncle can claim Simon as a dependent. False True

False Only Simon's parents may claim him as a dependent because the gross income test is waived and all of the other tests are met. Even though Simon earned more than the standard deduction amount of $12,550 (2021), he would not be able to claim himself as a dependent on his own return. One of the important details of this test is that the dependent must be a child of the taxpayer. Thus, if Simon's aunt and uncle support him (rather than his parents), the aunt and uncle could not claim Simon because the gross income test is not met.

Bill is an employee of Stevenson & Co. What information does his employer need to know to determine the amount of cash to withhold from his regular pay? (Select all that apply) Gross Pay Bill's filing status The information Bill gives to the employer on Form W-4. Bill's gross income

Gross Pay Bill's filing status The information Bill gives to the employer on Form W-4. Gross income has no bearing on the amount that an employer should withhold, as gross income includes income from sources other than salary.

The standard deduction is available to which category of taxpayers? A married taxpayer filing a separate return in instances where the other spouse itemizes. Non-resident aliens An individual filing a return for a period less than twelve months because of a change in an accounting period. Individuals over 65 and blind

Individuals over 65 and blind Individuals over 65 and blind qualify for the standard deduction. The standard deduction is unavailable to three categories of taxpayers: -An individual filing a return for a period less than twelve months because of a change in an accounting period. -A married taxpayer filing a separate return in instances where the other spouse itemizes. -Non-resident aliens.

Basic Formula:

It computes the taxable income of taxpayer and net tax payable or refund due based on gross income, adjusted gross income, taxable income and gross tax. Form 1040 has a simplified version of the basic formula for individuals.

Monica and Steve are married and have no dependent children. Steve dies in 2021. What are Monica's filing options? (Select all that apply) Married filing jointly Surviving spouse Head of household Single Married filing separately

Married filing jointly Married filing separately For tax year 2021, Monica can file a joint return, even though her husband died before year-end. Alternatively, Monica can file as a married individual filing a separate return. In 2022, however, Monica must file as a single taxpayer since she has no dependent children who would qualify her as a surviving spouse or head of household.

Refundable Credit

Refundable credits not only offset a taxpayer's income tax liability but, if the refundable credits exceed the taxpayer's tax liability, the government will refund this excess to the taxpayer. The principal type of refundable credit is the earned income credit. In addition, up to 40% of the American Opportunity Credit could be refundable depending on the taxpayer's situation. Also, up to $1,400 of the child tax credit may be refundable.

A single taxpayer provided the following information for 2021: Salary = $30,000 Interest on local government bonds (qualifies as a tax exclusion) = $4,050 Allowable itemized deductions = $14,600. What is their taxable income? $15,400 $22,300 $22,450 $26,300

$15,400 Taxable income equals $15,400 ($34,050 - $14,600 - $4,050).

Income, from whatever source derived, minus exclusions, whether reported or not, equals what? Taxable Income Gross Income Reported Income Adjusted Gross Income

Gross Income Income from whatever sources derived minus exclusions whether reported or not equals Gross Income.

Bill is an employee of Stevenson & Co. What information does his employer need to know to determine the amount of cash to withhold from his regular pay? (Select all that apply) Gross Pay Bill's filing status The information Bill gives to the employer on Form W-4 Bill's gross income

Gross Pay Bill's filing status The information Bill gives to the employer on Form W-4 Gross income has no bearing on the ammount that an employer should withold, as gross income includes income from sources other than salary.

Basic Formula

Implement a deductive approach in your tax planning studies by starting at the high-level (e.g. the Individual Tax Formula) and begin to incorporate more detail and nuance as you progress. This will help you to frame concepts within the broader architecture of the tax flow. Ultimately, this approach will lead you to a more comprehensive understanding of taxes in personal financial planning.

When discussing with your client his tax situation you mention he may elect a standard deduction of $12,550 (2021). Your client gives you his expenditures for the year which include the following: Medical expenses = $5,300 Property taxes = $4,900 Mortgage interest = $5,500. Your client's AGI for the year is $74,320. Would you advise him to take the standard or itemize his deductions when filing his return? Itemized Deduction Standard Deduction

Standard Deduction When you calculate your client's itemized deduction it is less than the standard deduction and, therefore, you would utilize the standard deduction. Medical expenses are allowed only in the amount greater than 7.5% of AGI. $74,320 x 0.075 = $5,574. Since there were only $5,300 of medical expenses, the client's costs do not exceed 7.5% of AGU and, as a result, no medical expense deduction is allowed. The remaining expenditures of $4,900 + $5,500 = $10,400 in itemized deductions. Because the standard deduction is greater ($12,550 in 2021), it would be used when filing the client's taxes.

Tax Rates and Gross Tax

Tax rates are the percentage rates set by Congress at which income is taxed. There are currently seven individual income tax rates. In 2022 they are: 10%, 12%, 22%, 24%, 32%, 35%, and 37% Taxpayers may compute their tax by multiplying the percentage rates found in the tax rate schedules times taxable income in the corresponding tax brackets. However, most taxpayers simply look in a tax table to find their gross tax. The gross tax is the amount of tax determined by this process.

Miscellaneous Credit

The miscellaneous credits, with the exception of the foreign tax credit, are specialized types of tax credits.

Income

The term income includes both taxable and non-taxable income. Although the term is not specifically defined in the tax law, it does include income from any source. Its meaning is close to that of the term revenue. However, it does not include a "return of capital." Thus, in the case of the sale of property, only the gain, not the entire proceeds from the sale, is viewed as income. Borrowed funds constitute a liability and do not constitute income. This view extends to the sale of inventory, where gross profit is viewed as income rather than the sale price.

Which of the following requirements must be met to claim a dependency exemption for an individual who is considered a qualifying child? (Select all that apply) An age test An earned income test An abode test A relationship test A support test

To claim a dependency exemption for an individual who is considered a qualifying child, the following additional requirements must be met: A relationship test An age test An abode test A support test

T or F: If you perform services for another person and she pays you by giving you a new computer, the fair market value of that computer is income to you.

True Gross income is almost everything of value received by a taxpayer during the taxable year. In fact, the law states that everything of value a taxpayer receives during the year is income unless the taxpayer can establish that it is not income. The amount of that income is the value of what is received.

The standard deduction is greater than total itemized deduction for most taxpayers. False True

True True. High-income taxpayers are more likely to itemize than lower-earning taxpayers simply because they incur more expenses that can be itemized.

Foreign Tax Credit

U.S. citizens, resident aliens and U.S. corporations are subject to U.S. taxation on their worldwide income. To reduce double taxation, the tax law provides a foreign tax credit for income taxes paid or accrued to a foreign country or a U.S. possession. Taxpayers may elect to take a deduction for the taxes paid or accrued in lieu of a foreign tax credit. In general, the foreign tax credit results in a greater tax benefit because a credit fully offsets tax liability, while a deduction merely reduces taxable income.

A joint return may be filed if a couple is married ________________. by the end of the calendar year the majority of the year before June 30th the entire year

by the end of the calendar year A joint return may be filed if a couple is married by the end of the calendar year.

Income from whatever source derived minus exclusions equals ______________. gross income gross tax taxable income adjusted gross income

gross income Income from whatever source derived - exclusions = gross income.

self employment tax example

https://learn.bostonifi.com/content/courses/common/CFP_Course_4/acfp254/detr_tax/self_emptax_po.html

Itemized Deductions

https://www.irs.gov/pub/irs-pdf/f1040sa.pdf

Taxable income

is adjusted gross income reduced by deductions from AGI. It is the amount of income that is taxed. Long-term capital gains offer taxpayers the potential for beneficial tax rates (i.e., 0%/15%/20%). Listen in to this audio guide to build an understanding of how taxable income influences capital gains rate(s).

Gross income

is everything of value received by a taxpayer during the taxable year unless it is established that it is not income. Gross income is income reduced by exclusions. To calculate gross income, excluded income need not be disclosed. Section 61 (a) states that unless otherwise provided, "gross income means all income from whatever source derived." Gross income does not appear as an item on Form 1040.

A widow or widower without a qualified child or qualified relative can file as _______________________ the year his or her spouse dies if they do not remarry. qualifying widow(er) head of household surviving spouse married filing jointly

married filing jointly A widow or widower can file a joint return for the year his or her spouse dies if the widow or widower does not remarry. For the two years after the year of the death, the widow or widower can file as a surviving spouse (i.e., qualifying widow(er) only if he or she meets specific conditions.

Deductions for adjusted gross income are also referred to as _____________________. credits below-the-line deductions above-the-line deductions exclusions

above-the-line deductions Deductions for adjusted gross income are also referred to as above-the-line deductions.

What is reported on schedule D?

Schedule D is one of the many schedules provided by the IRS and attached to U.S. Individual Income Tax Return Form 1040, which you must complete to report any gains or losses you realize from the sale of your capital assets. Your capital assets are for tax purposes, pretty much, everything you own and use for pleasure or investment purposes. The capital assets you are most likely to report on Schedule D are the stocks, bonds, and homes you sell