Chapter 3: Tax Formula and Tax Determination; An Overview of Property Transactions

two types of dependents

-qualifying child -qualifying relative

Two categories of deductions for individual taxpayers

1) deductions for adjusted gross income 2) deductions from adjusted gross income

collectibles

A special type of capital asset, the gain from which is taxed at a maximum rate of 28 percent if the holding period is more than one year. Examples include art, rugs, antiques, gems, metals, stamps, some coins and bullion, and alcoholic beverages held for investment.

tax table

A table that is provided for taxpayers with less than $100,000 of taxable income. Separate columns are provided for single taxpayers, married taxpayers filing jointly, heads of households, and married taxpayers filing separately.

child tax credit

A tax credit based solely on the number of qualifying children under age 17. The maximum credit available is $2,000 per qualifying child. (In addition, a $500 nonrefundable credit is available for qualifying dependents other than qualifying children.) A qualifying child must be claimed as a dependent on a parent's tax return and have a Social Security number to qualify for the credit. Taxpayers who qualify for the child tax credit may also qualify for a supplemental credit. The supplemental credit is treated as a component of the earned income credit and is therefore refundable. The credit is phased out for higher-income taxpayers.

qualifying child

An individual who, as to the taxpayer, satisfies the relationship, abode, and age tests. To be claimed as a dependent, such individual must also meet the citizenship and joint return tests and not be self-supporting.

qualifying relative

An individual who, as to the taxpayer, satisfies the relationship, gross income, support, citizenship, and joint return tests. Such an individual can be claimed as a dependent of the taxpayer.

head-of-household

An unmarried individual who maintains a household for another and satisfies certain conditions set forth in § 2(b). This status enables the taxpayer to use a set of income tax rates that are lower than those applicable to other unmarried individuals but higher than those applicable to surviving spouses and married persons filing a joint return.

dependent tax credit

For 2018 through 2025, the TCJA of 2017 replaced the dependency exemption with a $500 nonrefundable credit. This credit can be claimed for dependents who are not a qualifying child or under the age of 17. The dependent must be a citizen or resident of the United States.

unearned income

Income received but not yet earned. Normally, such income is taxed when received, even for accrual basis taxpayers.

filing status

Individual taxpayers are placed in one of five filing statuses each year (single, married filing jointly, married filing separately, surviving spouse, or head of household). Marital status and household support are key determinants. Filing status is used to determine the taxpayer's filing requirements, standard deduction, eligibility for certain deductions and credits, and tax liability.

kiddie tax

Passive income, such as interest and dividends, that is recognized by a child under age 19 (or under age 24 if a full-time student) is taxed according to the brackets applicable to the child's parent(s), generally to the extent the income exceeds $2,200 for 2021. The additional tax is assessed regardless of the source of the income or the income's underlying property.

Itemized deductions

Personal expenditures allowed by the Code as deductions from adjusted gross income. Examples include certain medical expenses, interest on home mortgages, state income taxes, and charitable contributions. Itemized deductions are reported on Schedule A of Form 1040.

tax rate schedules

Rate schedules that are used by upper-income taxpayers and those not permitted to use the tax table. Separate rate schedules are provided for married individuals filing jointly, heads of households, single taxpayers, estates and trusts, and married individuals filing separate returns.

abandoned spouse

The abandoned spouse provision enables a married taxpayer with a dependent child whose spouse did not live in the taxpayer's home during the last six months of the tax year to file as a head of household rather than as married filing separately.

marriage penalty

The additional tax liability that results for a married couple when compared with what their tax liability would be if they were not married and filed separate returns.

e-file

The electronic filing of a tax return. The filing is either direct or indirect. In direct filing, the taxpayer goes online using a computer and tax return preparation software. Indirect filing occurs when a taxpayer utilizes an authorized IRS e-file provider. The provider often is the tax return preparer.

Standard deduction

The individual taxpayer can either itemize deductions or take the standard deduction. The amount of the standard deduction depends on the taxpayer's filing status (single, head of household, married filing jointly, surviving spouse, or married filing separately). For 2021, the amount of the standard deduction ranges from $12,550 (for single) to $25,100 (for married, filing jointly). Additional standard deductions of either $1,350 (for married taxpayers) or $1,700 (for single taxpayers) are available if the taxpayer is blind or age 65 or over. Limitations exist on the amount of the standard deduction of a taxpayer who is another taxpayer's dependent. The standard deduction amounts are adjusted for inflation each year.

dependency exemptions

The tax law provides an exemption for each individual taxpayer and an additional exemption for the taxpayer's spouse if a joint return is filed. An individual may also claim a dependency exemption for each dependent, provided certain tests are met. The TCJA of 2017 suspended the deduction for exemptions for tax years after 2017 (and through 2025).

personal exemptions

The tax law provides an exemption for each individual taxpayer and an additional exemption for the taxpayer's spouse if a joint return is filed. An individual may also claim a dependency exemption for each dependent, provided certain tests are met. The TCJA of 2017 suspended the deduction for exemptions for tax years after 2017 (and through 2025).

multiple support agreement

To qualify for a dependency exemption, the support test must be satisfied. This requires that over 50 percent of the support of the potential dependent be provided by the taxpayer. Where no one person provides more than 50 percent of the support, a multiple support agreement enables a taxpayer to still qualify for the dependency exemption. Any person who contributed more than 10 percent of the support is entitled to claim the exemption if each person in the group who contributed more than 10 percent files a written consent (Form 2120). Each person who is a party to the multiple support agreement must meet all of the other requirements for claiming the dependency exemption.

surviving spouse

When a husband or wife predeceases the other spouse, the survivor is known as a surviving spouse. Under certain conditions, a surviving spouse may be entitled to use the income tax rates in § 1(a) (those applicable to married persons filing a joint return) for the two years after the year of death of his or her spouse.

realized gain (or loss) calculation

amount realized from the sale - adjusted basis of the property = realized gain (or loss)

capital assets

any property other than inventory, accounts receivable, and depreciable property or real estate used in a business