Tax Test 2

For Related parties losses are _____ deductible. Possession of asset has not changed

Not

The ____ _____ tax is intended to provide basic pension coverage for the retired and disabled

Social Security

In general, taxpayers recognize interest income when they receive the interest ______

payments

When couples legally divorce, one spouse may be required to provide financial support to the other in the form of _______

Alimony

Net Unearned income is the lessor of 1. The child's gross unearned income minus $_______ or 2. the child's ______ income

$2,200 Taxable

There are 2 basic types of annuities: 1. Annuities paid over a ______ period 2. Annuities paid over a person's ______

Fixed Life

Up to $_______ of gain on the sale of personal residence can be excluded for MFJ if: 1. Must have owned the home for at least 2 of the last 5 years 2. Must have lived in the home for 2 out of the 5 years (can be spread out)

$500,000

Netting Process For capital gains - Taxpayers can deduct up to $______ of net capital losses against ordinary income. Net capital losses in excess of this amount retain their short or long term character and are carried forward and treated as though they were incurred in the subsequent year. -Taxpayers use net ______ term capital losses to offset net short term capital gains or net ______ term capital losses to offset net long term gains. -Net long term gains are taxed at a maximum of _____% if from the collectible and small business stock, a maximum of _____% if from the unrecaptured 1250 gain category, or 0/15/20% for all other long term capital gains.

- 3000 - long, short - 28%, 25%

Interest (FROM) - _____ _____ is any debt secured by a qualified residence that is incurred in acquiring, constructing, or substantially improving the residence - For acquisition indebtness incurred after 12/31/17, taxpayers may only deduct mortgage interest up to $_______ - Before 12/15/17, up to $________ even if refinanced after that date

- Acquisition Indebtness - $750,000 - $1,000,000

Self employment tax deductions (FOR AGI) - Social Security and Medicare are paid by both _____ and _____ - _______ deduct SS and Medicare taxes they pay on employee salaries - Self employed are required to pay a _____ _____ tax - Since both portions of the SS and Medicare are being paid by the same person, employer's share can be _______

- Employers and employees - Employers - Self employment - deducted

Rental and Royalty Expenses (Schedule E) - most commonly considered to be ______ activities but are claimed _____ the line - Despite preferential treatment, the deductibility of rental _____ is subject to limitations

- Investment ,Above - Losses

Investment Interest Expense - Beginning in 2018, the only expense associated with investments that remains deductible is _______ _____ expense - When tax payers borrow money to acquire investments, the interest expense they pay on the loan is _____ ____ expense - A taxpayer's investment interest expense deduction for the year is limited by the taxpayer;s net ______ income - Investment income generally does not include _____ ____ and _____ _____ - An additional _____% tax is imposed on net investment income. It is imposed on the lessor of net investment income or the excess of modified AGI over 250,000 for MJF and 200,000 for other taxpayers.

- Investment Interest Expense - Investment Interest Expense - Investment - Capital gains and qualified dividends - 3.8%

Trade and Business Expenses (Schedule C) - Must be ______ and ______ for the activity - Not _____ activities that require little to no effort

- Ordinary and Necessary - Investment

Health insurance for Self Employed - ______ deductible to the extent of self-employment income - For self, spouse, dependents, and children under the age of _____ - Self employed tax payers are not allowed to deduct health care insurance premiums if the tax payer is eligible to participate in an ______-_____ health care plan - Employers are allowed to deduct health care premiums as _____ ______, while employees are allowed to exclude these premiums from ____ _____

- Premiums - 27 - Employer-Provided - Compensation Expense, Gross Income

Passive Activity Income and Losses - ____ ____ hurdle limits a taxpayer's deductible operating losses to the taxpayer's tax basis in the business or rental activity - When a loss from a business or business related activity clears the tax basis hurdle, it must next clear the ___ _____ hurdle - The ____ ____ hurdle is means to stop the deduction of artificial ordinary losses - The ______ ____ _____ rule defines a passive activity as any activity which involves the conduct of a trade or business, and in which the taxpayer does not materially participate

- Tax basis - At Risk - At risk -Passive Activity Loss (PAL)

Capital Gains and Losses - When tax payers buy and hold assets wit appreciation potential, they typically are investing in ____ _____ - Artwork, corporate stock, bonds, personal residence, and even Iphones are _____ _____ - The real advantages of investing in capital assets are that (1) gains are deferred for tax purposes until the tax payer _____ or _____ the asset and (2) gains generally are taxed at preferential rates

- capital assets - capital assets - sold or disposed

Taxes (From) - State, local, and foreign income taxes, including state and local taxes paid during the year through employer _______, estimated tax payments, and overpayments - State and local _____ ____ taxes on property held for personal or investment purposes. - State and local _______ taxes that are assessed on the value of specific property - The total itemized deduction for state and local tax is $______, the itemized deduction for foreign income taxes in not subject to this limitation

- withholdings - real estate - property - $10,000

Types of capital gains and losses - Short term gains are taxed at _____ rates where as long term capital gains is taxed at _____ rates - Not all long term capital gains are taxed equally

-ordinary -preferential

The kiddie tax applies if: 1. The child is under _____ years old 2. The child is 18 years old at year end but the earned income does not exceed half of her _____ 3. The child is over the age of 18 but under the age of ______ and is a full time student during the year and earned income does not exceed half of support

1. 18 2. support 3. 24

Prizes, Awards, and Gambling winnings are included in gross income unless: 1. Win a scientific/literary/charitable achievement where the the recipient was selected without any ______, no ______ services are required, and the payer of the award transfers the prize t o a government unit or ______ 2. $_______ limit on employee awards for length of service or safety achievement 3. Olympic Medals - value of awards can be excluded from income if taxpayer's AGI after excluding is below $________

1. Action, Future, Charitable 2. 400 3. 1 million

Taxpayers recognize gross income when: 1. They receive an _______ _____ 2. They ____ the income 3. No tax provision allows them to ____ or _____ the income from gross income for that year

1. Economic benefit 2. realize 3. exclude or defer

From AGI Deductions :Itemized Deductions 1. Deductions which relate to ______-motivated activities 2. Deductions which are ____ in nature, but are allowed to subsidize desirable activities 3. Deductions which provide relief for taxpayers who ability to pay taxes has been involuntarily ______

1. Profit 2. Personal 3. reduced

Two key characteristics that affect after-tax rates of return from investments are : 1. The _____ of tax payments or tax benefits 2. The rate at which investment income or gains are taxed or deductible expenses or losses generate tax ______

1. Timing 2. Savings

The tax law defines alimony as: 1. A transfer of ______ made under a written separation agreement 2. The separation or divorce does not designate the payment as something other than ______ 3. In the case of legally separated (or divorced) taxpayers under the agreement, the spouse do not live together when the payment is _____ 4. The payment cannot continue after the ____ of the recipient

1. cash 2. alimony 3. made 4. death

Under the realization principle, income is realized when: 1. a tax payer engages in a _______ with another party 2. The transaction results in a measurable change in _______ rights

1. transaction 2. property

Net earnings from self employment is _______% of net income

92.35

The taxpayer's method of _____ generally determines the year in which realized income is recognized and included in gross income

Accounting

Most large corporations use the _____ method of accounting

Accrual

Under the ______ method, income is generally recognized when earned, and expenses are generally deducted in the period when liabilities are incurred

Accrual

The _____ _____ tax system was implemented to ensure that tax payers generating income pay some minimum amount of income tax each year - The tax is now targeted at higher income tax payers who are benefiting from excessive use of preferential items. - It is an alternate tax base meant to more closely reflect economic income than regular income tax base - It is more inclusive (More broadly defined) than regular income tax base

Alternate Minimum

The ____ ______ tax credit is available to students for the first 4 years after highschool education. To receive: 1. Must be enrolled in a post secondary educational institution at least 1/2 time. ($2,500) annually 2. tuition, fees, and Course material qualify. 3. Up to 40% credit refundable.

American Opportunity

Qualified dividends - Consistent with the general rule for taxation on interest income, dividend payments are taxed _____ - Qualified dividends are taxed at ______ rates

Annually Preferential

Individuals often purchase ______ as a a means of generating a fixed income stream during retirement

Annuities

An ______ is an investment that pays a stream of equal payments over time

Annuity

Taxpayers use the ______ ______ ratio to determine the portion of each payment that is nontaxable return of capital

Annuity Exclusion

The courts developed the _______ of _____ doctrine to prevent taxpayers from arbitrarily transferring the taxation on their income to others - The taxpayer who earns the income from services must recognize the income - Income from property, such as dividends and interest, is taxable to the person who actually owns the income-producing property

Assignment of Income Doctrine

The two primary tax differences between independent contractors and employees relate to: 1. The amount of _____ taxes payable and 2. the deductibility of ______ expense

Fica Business

Individual taxpayers generally file tax returns reporting their taxable income for a ______ period, whereas corporations often use a ____ year end

Calendar Fiscal

Under the _____ method, income is recognized when it is received (rather than earned) and deductions are claimed when they are paid (rather than incurred). What about trying to shift income from this year to next year? Cant have that? Courts enacted the ______ _____ doctrine, which means that a taxpayer realizes income when it is actually constructively received

Cash Constructive Receipt

The _______ of _____ doctrine is another judicial doctrine created to address the timing of income recognition. This doctrine states that income has been realized if a taxpayer receives income and there are no restrictions on the taxpayer's use of the income

Claim of Right

Under the ______ ______ systems, income earned from services by one spouse is treated as though it were earned equally by both spouses. Property that a spouse brings into the marriage is treated as spouse's separate property - 1/2 the income earned from the services of one spouse is included in the gross income of another spouse - 1/2 the income from property held as community property by the married couple is included in the gross income of each spouse.

Community Property

Losses on sale of personal use asset - Losses on sale are not ______ and are not part of the _____ process, but the gains are still taxable

Deductible Netting

_______ reduce taxable income dollar for dollar, but the tax savings deduction generated depends on the taxpayer's marginal tax rate

Deductions

Medical Expenses (From) - Taxpayers may also deduct medical expenses incurred to treat their _______ and _____ - Common medical expenses include prescriptions, insulin, and medical aid such as eye glasses, contacts, and wheelchairs - Over the counter medications are not deductible

Dependents and Spouses.

The income and deductions from a _____ _____ _____, such as partnerships or S corporations, go through the owners of the entity (Partners or Shareholders). The owner must report income or deductions as though they operated a portion of the business personally

Flow Through Entities

_____ AGI deductions reduce taxable income dollar for dollar

For

______ AGI deductions sometimes have no affect on taxable income

From

_____ _____ is income that taxpayers realize, recognize, and report on their tax returns for the year

Gross Income

_______ _____ means income from whatever source derived, unless excluded by law. Includes realized in any form, whether money, property, or services

Gross Income

If the payment of alimony meets the 4 requirements, then the amount of the payment is included in _____ ______ of the person receiving it and is deductible _____ _____ by the person paying it

Gross income For AGI

Unearned income or income from property such a dividends from stocks or interest from bonds is taxed to the owner of the property. A parent can shift unearned income to child by transferring actual ownership. The tax law that limits this is the _____ tax.

Kiddie

The _____ _____ credit is a nonrefundable credit that applies just to cost of tuition and fees - $2000 credit a year

Lifetime Learning

PALS is subject to _____

Limitations

The ______ tax helps pay medical costs for qualified individuals

Medicare

______ _____ interest is the most common example of exclusion provision

Municipal Bond

PIGS = ______ _____ = ordinary rates for individuals

Ordinary Income

Annuity Exclusion Ration = ?

Original investment / Expected Value of Annuity = return of capital percentage

For flow through entities: 1. Each partner or S corp shareholder reports their share of the entities income or deductions, generally in proportion to his or her _______ percentage, on their Individual tax return 2. Each item the partners or shareholders report in their tax return retains its underlying ______ characteristics

Ownership Tax

_______ _____ generate operating income and operating losses. - Operating income is always taxed ______ at _____ rates - Operating losses are either deductible _____ or deferred and deducted later at _____ rates

Passive Investments - Annually, Ordinary - Annually, ordinary

_______ ________, which are investments producing dividends, interest, royalties, annuities, or capital gains, may be taxed at ordinary or preferential rates, or may be exempt from taxation. - Losses from these are _____ until investment is sold

Portfolio Investments

A _______ is not typically included in gross income because it usually represents a return of capital

Refund

The ______ _____ is a flat amount that most individuals can elect to deduct instead of deducting their itemized deductions. Taxpayers generally deduct the greater of these two deductions

Standard

Municipal bonds include bonds issued by _____ and ______ governments and exclusions is generally recognized as a _____ to the governments (Treasury Bonds are still taxable)

State and local Subsidy

Under the _____ _____ rule: If you got a tax benefit in a prior year from claiming an expenditure, the refund is included in gross income to the extent that there was a benefit. EX: Say in the prior year you decided to claim a business expense of $1000 as a for AGI DEDUCTION, REDUCING AGI BY $1000. IN THE CURRENT YEAR, $250 IS REIMBURSED, so you only have paid $750. The $250 should be included in taxable income in current year.

Tax Benefit

In general, the _____ _____ are widest and higher levels of income are taxed at the lowest rates for MFJ, followed by HOH, Single, Then MFS

Tax Brackets

_____ _____ reduce a taxpayer's tax liability dollar for dollar

Tax Credits

For administrative convenience and the prevent low and middle income taxpayers from making math errors using a tax rate schedule, the IRS provides ____ ____ that present the gross tax for various amounts of taxable income under $100,000

Tax Tables

Business activities are sometimes referred to as a _____ or _____ and these activities requires a relatively ____ level of involvement (Includes self-employed)

Trade or Business High

If kiddie tax applies, children must pay a tax on a certain amount of the net ______ income at tax rates that apply to _____ and _____

Unearned income Trusts and estates

_____ _______ occur when an investor sells stock or securities at a loss within 30 days either before or after the day of sale buys substantially identical stock or securities. -Realized losses are not recognized

Wash Sales