income tax
standard deduction of dependents 2
"In 2019 Joe received $1,350 of interest income from a local bank. The interest was his only source of income for the year. His standard deduction is $1,100, which is the greater of (a) $1,100 or (b) $0 + $350"
standard deduction of dependents 1
"Sherry's parents can claim her as a dependent on their tax return. In 2019 her only source of income was a part-time job in a local store where she earned $2,500 during the year. Sherry's standard deduction is $2,850, which is the greater of (a) $1,100 or (b) $2,500 + $350. As a result, Sherry would owe no income tax on her wages."
3.The deductible amount of student loan interest is reduced when modified AGI for those filing married jointly reaches__________.
$140,000
Income excluded from gross income
- Fringe benefits qualify if they meet the nondiscrimination rules (an extra benefit supplementing an employee's salary) examples: No-additional-cost services provided to an employee
Head of Household
- Must be unmarried at the end of the year, unless a married taxpayer living apart from the spouse during the last six months! of the year might qualilfy as unmarried -a taxpayer must pay for more than half the cost of keeping up a home for the year -must be a U.S. citizen or resident -must maintain a household for qualifying person for more than half the year.(either qualifying child or qualifying relative)(boyfriend or girlfriend dont count)(exception: you can be head of household of parents even if they live in a separate household) -is much cheaper than single, but not as good as married filling jointly - personal expenses such as clothing, medical expenses, transportaion costs don't count. It has to be expenses on the household like rent, mortgage..
other types of taxable income
- jury duty - Prizes and awards -Forgiveness of debt -Insurance proceeds in excess of the adjusted basis of the property
Qualifying Widow(er) with Dependent Child
- permitted for only 2 years -must be eligible to file a joint return the year the spouse died (not remarried) -must be unmarried -Must pay for more than half the costs of a household that is the principal place of residence of the taxpayer and child for the entire year (expection: temporar absences of dependant are permitted such as military,vactions..)
Married Filing Jointly (MFJ)
-Must be legally married on the last day of the year -It does not matter if only one has earned income - if one of the spouses dies that year, they still have to file married filing jointly with the deseased spouse(unless you remarry that year) - if you are in the process of divorce you can file a joint return, but you shouldnt because of tax liabilities
tax refund or amount due with return
-excess payments results in a refund - Remaining tax liability mean an amount is owed to IRS
Married Filing Separatly
-must be married -the standard deduction can be taken only if both make the same election -must show the social security number of the other spouse on the taxpayer's return -Only in unusual circumstanes is it advantageous for a married couple to file MFS
Filing Status
1. Single 2. Married filing jointly 3. Married filing separate return 4. Head of Household 5. Qualifying widow(er) with a dependent child.
2.The amount of the penalty is reported to the taxpayer by the financial institution on a Form___________.
1099-INT
state refund
1099-g
2.To meet the age test, a child who is not disabled must be _________, or _________ if a full-time student.
19,24 (also, the child must be younger than the person claiming the dependency)
2.The maximum deduction for a couple who are both eligible educators and filing MFJ is ______.
500
1.To be eligible for the deduction, an educator must work a least _____ hours in the job.
900
Qualifying Child
A Qualifying Child must meet five specific tests: 1. Relationship test 2. Age test 3. Residency test 4. Support test 5. Special test for qualifying child of more than one taxpayer
Define and give examples of a de minimis employee fringe benefit.
A de minimis fringe benefit is an item of economic value given to employees, the value of which is so small that keeping track of which employees received the benefit is administratively impractical. Examples include: small holiday gifts such as turkeys or hams; holiday parties; birthday gifts; free coffee, etc.
1. What is a for AGI deduction? Give three examples.
A deduction for AGI is a deduction permitted under the IRC that is used to calculate AGI. It can also be thought of as a deduction from gross income to arrive at AGI. Examples include deductions for IRAs, Keoghs, or other self-employed qualified pension plans; student loan interest; one-half the self-employment tax; self-employed health insurance deduction; penalty on early withdrawal of savings.
7. What are the five specific tests necessary to be a qualifying child of the taxpayer?
A person is a qualifying child if he or she meets all five of the following tests: relationship test, age test, residency test, support test, and special test for qualifying child of more than one taxpayer.
What are the four specific tests necessary to be a qualifying relative of the taxpayer?
A person qualifies as a qualifying relative if he or she meets all four of the following tests: not a qualifying child test, relationship or member of household test, gross income test, and support test.
Qualified student loan interest
A qualified education loan is one incurred by the taxpayer solely to pay qualified education expenses. The deduction is limited to $2,500 per year.
standard deduction
A stated amount that you may subtract from adjusted gross income(AGI) instead of itemizing your deductions (an amount of money set by the IRS that is not taxed)
Alimony Paid 2
Alimony is one of three potential payments that can exist in a divorce or legal separation. Alimony, child support, property settlement Only alimony has a tax consequence. If payments properly qualify as alimony, the payments are deductible by the payer as a for AGI, or an above- the-line, deduction.
Mimi is 22 years old and is a full-time student at Ocean County Community College. She lives with her parents, who provide all of her support. During the summer, she put her Web design skills to work and earned $5,000. Can Mimi's parents claim her as a dependent on their joint tax return? Why or why not? Assume that all five tests under qualifying child are met.
All of the dependency tests are met by Mimi's parents, so they can claim her as a dependent. The fact that Mimi earned $5,000 does not matter since Mimi is under age 24 and she is a full-time student at a qualifying educational institution. Thus, the gross income test is not necessary for a qualifying child as long as Mimi does not provide more than half of her own support.
What is an employer-provided fringe benefit?
An employer-provided fringe benefit is an item of economic value provided by an employer to an employee.
What age must a child be at the end of the year to meet the age test under the qualifying child rules?
At the end of the year, the child must be one of the following: under the age of 19; under the age of 24 and a full-time student; or totally and permanently disabled regardless of age. In addition, the child must be younger than the person claiming the dependency.
•Used by almost all individuals to file their tax returns
Cash Receipts and Disbursements Method
tax preparers
Circular 230 sets forth rules which must be followed by all paid tax preparers
What is meant by the concept of constructive receipt?
Constructive receipt of income means that the income is available to or in the control of the taxpayer regardless of whether the taxpayer chooses to utilize the income. For example, income credited to a savings account at year-end is constructively received even if the taxpayer does not withdraw it for use.
1.An individual must recognize income on his or her tax return if the transaction meets three conditions. Name the three conditions: ________, ________, ________
Economic benefit Conclusion Not tax-exempt income
1.A taxpayer filed an automatic extension before April 15 but sent no money to the IRS. He then filed his return by June 2 and paid the amount due of $3,000. What are the amounts for the failure to file a tax return penalty and the failure to pay penalty?
Failure to file does not apply but failure to pay is $30 ($3000 x 0.5)2
1.When preparing a tax return, you will seldom use any of the schedules. True or False?
False
2.One limitation on this deduction is that taxpayers cannot deduct the premium cost that exceeds gross earnings from self-employment. True or False?
False
1.If taxpayers make contributions to, or withdrawals from, an HSA during the year, they must complete a Form _________ and attach it to their Form _______.
Form 8889 and Form 1040
Adjusted Gross Income (AGI)
Gross income minus permitted deductions.
1.In order for the interest on a student loan to qualify for the deduction, the student must be enrolled at least___________.
Half-time
De minimis rule
Holiday turkeys, company picnics, these are not taxable (checks are taxable
3.The administrative tax authority with the most strength of authority is _______.
IRS Treasury Regulations
Under what circumstances are social security benefits taxable to a single taxpayer?
If the "provisional income" of a single taxpayer exceeds $25,000, then a portion of the social security benefits received will be taxable. Provisional income is Adjusted Gross Income plus certain tax-exempt interest plus half of the social security benefits received (some other items are also added, but they are less common).
How to report interest? and dividends?
If the amount of interest is more than $1,500, use Schedule B of Form 1040
Under what circumstances must a taxpayer use a tax rate schedule rather than using a tax table?
If the taxable income of a taxpayer is $100,000 or more, a tax rate schedule must be used
When and at what rate is interest calculated on amounts owed to the IRS?
If the taxpayer still owes tax after April 15th. The rate charged is the federal short-term rate plus 3 percentage points.
1. Explain how income is recognized under the cash method of accounting.
Income is recognized under the cash method of accounting when the taxpayer receives or constructively receives cash, property, or services.
The taxability of components of gross income includes...
Interest, Dividends, Tax refunds, and Social Security Benefits
IRS legal foundation
Much of the Internal Revenue Code has its legal foundation in the 16th Amendment
Tax payment
Normally taxpayers pay some or all of their tax liability prior to the due date of the tax return. Most commonly, taxpayers make payment through income tax withholding and quarterly estimated tax payments
What is a multiple support agreement, and what is its purpose?
Normally, in order to claim someone as a dependent a taxpayer must provide more than half the support of the person. At times, an individual may receive support from multiple persons, but no one person has provided more than 50% of the support. In such a case, a multiple support agreement can be signed. If every one of the persons providing support could claim the individual as a dependent (absent the support test) then one person who provided more than 10% of the support can receive the nonrefundable family credit if all persons sign a written multiple support agreement. The purpose of the agreement is so someone can claim the dependent rather than no one. Further, the agreement provides a mechanism such that all parties can agree on who that person should be.
Single
Not married as of the last day of the year
1.The three types of tax rate structures are ________, _________, and _________.
Progressive, proportional, and regressive
The tax rate structure for which the tax rate remains the same for all levels of the tax base is the __________ rate structure
Proportional
1.What are the five specific tests you need to meet to claim someone as a qualifying child?
Relationship test, Age test, Residency test Support test, Special test for qualifying child of more than one taxpayer
Deduction for Half of Self-Employment Tax
Self-employed individuals pay self-employment, or FICA, tax equal to 15.3% of net earnings from self-employment. Net earnings are the business revenues minus the business expenses. Self-employment tax is calculated on Form SE.
How to reduce the tax liability?
Tax payments and Credits
If they are used to pay for qualified medical expenses, distributions from HSAs are
Tax-free
Tax Calculation
Taxes are levied by multiplying a tax rate (the rate of tax) by a tax base (the amount taxed).
Dependents
The Dependent must be a qualifying child or relative and meet three general tests: 1. Dependent taxpayer test 2. Joint return test 3.Citizen or resident test (can be also a resident of canada or mexico or an adopted child of the taxpayer's household all year). -Taxpayers may have related individuals living with them and/or they may provide financial support for a related individual The existence of dependents is important for determination of child credits, filing status, and other matters
The most commonly relied-on statutory authority is
The Internal Revenue Code
Self-employed individuals may be able to deduct 100% of self-employed health insurance payments.
The amount of the deduction may be limited in two respects: •First, taxpayers cannot take a deduction for the amount in excess of net earnings from self-employment from the trade or business under which coverage is provided. The second limitation pertains to availability of other health insurance coverage
Why is it important to determine if the taxpayer has dependents to be claimed on the income tax return?
The existence and number of dependents affect the determination of total tax liability in areas such as child credits and filing status.
Amount of tax liability
The tax liability is computed by using the tax tables or the tax rate schedules. Taxable income of $100,00 or more must use the tax rate schedules.
Penalty on Early Withdrawal of Savings
The taxpayer is entitled to report the penalty as a for AGI deduction on line 17 of the Schedule 1 of the Form 1040. The amount of the penalty is reported on a Form 1099-INT, issued by the financial institution.
What are the three general tests that a qualifying person must meet to be a dependent of the taxpayer?
To be a dependent of the taxpayer, a qualifying child and a qualifying relative must meet the three general tests: dependent taxpayer test, joint return test and citizen or resident test.
Residency test
To meet this test, your child must have lived with you for more than half the year. There are exceptions for temporary absences, such as college.
1.An individual is required to impute interest on a deferred payment contract where no interest, or a low rate of interest, is stated. True or False?
True
1.Even though you are in the process of getting a divorce, you can file as married filing jointly. True or False?
True
1.Income may be realized in any form, whether in money, property, or services. True or False?
True
2.If you provide consulting services to your friend and, in exchange, he fixes your car, you and your friend must report on both tax returns the fair market value of the services provided. True or False?
True
2.In general, scholarships are not taxable if the use of the money is to pay tuition, fees, books, supplies and equipment. True or False?
True
2.The social security number of the taxpayer's spouse must be shown on the taxpayer's tax return when filing as married filing separately. True or False?
True
2.Under the student loan program, qualified education expenses include __________, and __________.
Tuition and fees
1.The committee charged with considering tax legislation in the House of Representatives is called the ________________ Committee.
Ways and Means
10. Under what circumstances is a dividend nontaxable to a shareholder recipient?
When a distribution is made by a corporation to its shareholders, the distribution is a taxable dividend to the extent of current or accumulated earnings and profits of the corporation. If the distribution exceeds E&P, it is nontaxable return of capital to the extent of the shareholder's basis in the stock. Once the distribution exceeds basis, the excess is treated as a capital gain. Thus, a distribution is nontaxable if it is in excess of the E&P of the corporation and the excess is less than the shareholder's basis in the stock.
2. Are there circumstances in which income is recognized even when a cash-basis taxpayer does not receive cash? Explain.
Yes. A taxpayer can indirectly receive cash. If a cash-basis taxpayer owes money to a bank and someone else pays the loan to the bank on behalf of the taxpayer, the taxpayer must record income for the amount of debt repaid by the third party. Another example is interest on certain U.S. Savings Bonds. A taxpayer can elect to report the interest on the bonds annually even though no cash is received.
20. Esmeralda is 20 years of age and a full-time student living with her parents. She had wages of $500 ($50 of income tax withholding) for 2019. Can Esmeralda file a tax return to claim her $50 of income tax withholding even though she is a dependent of her parents? a. Yes, Esmeralda can file a tax return. b. No, Esmeralda cannot file a tax return. c. Esmeralda's parents can report her wages on their tax return. d. No, Esmeralda is a dependent of her parents.
a
Form 1099-INT
a statement of the interest your bank paid on your savings that year
refundable tax credit
a tax credit that can reduce one's income tax liability to below zero with the excess being refunded to the taxpayer
nonrefundable tax credit
a tax credit that can reduce one's tax liability only to zero; however, if the credit is more than the tax liability, the excess is not refunded
1.The early withdrawal penalty is reported on Schedule 1 of Form 1040 and as an ___________ deduction.
above-the-line
Alimony Paid
alimony will no longer be deductible by the payer spouse nor included in income of the recipient spouse. This rule will only apply to divorce or separation agreements executed after December 31, 2018 and will also affect those agreements executed on or before December 31, 2018, but modified after that date to include these new provisions.
Distributions from an HSA
are tax free as long as they are used to pay for qualified medical expenses
. A taxpayer's spouse died on December 31, 2018. He has no qualifying child. Which status should the taxpayer select when filing his 2019 tax return? a. Qualifying widow(er). b. Married filing jointly. c. Single. d. Married filing separately.
c
eligible educator
can deduct up to $250 of qualified education expenses as a for AGI deduction. •If the taxpayers' filing status is married filing jointly and both individuals are eligible educators, the maximum deduction is $500. •but neither spouse can deduct more than $250 of his or her expenses. teacher, instructor, counselor, principal, or aide in a kindergarten through 12th grade school who devotes at least 900 hours in the school year to that job
Age test
child must be younger than the individual claiming the child as a qualifying child and either under age 19 at the end of the year, under age 24 at the end of the year and a full-time student, or permanently and totally disabled
Relationship test
child, grandchild, stepchild, foster child, sibilngs, half siblings (not cousins)
16. A single taxpayer is 26 years old and has wages of $18,000 and interest income of $450. Which Form 1040 Schedule must the taxpayer use? a. Schedule 1. b. Schedule 2. c. Schedule 3. d. The taxpayer does not need to use a Schedule.
d
17. Which Schedule must the taxpayer use to claim a payment made for alimony? a. Schedule 1. b. Schedule 2. c. Schedule 3. d. The taxpayer does not need to use a Schedule.
d
18. A taxpayer is married with a qualifying child (dependent), but she has been living separately from her spouse for the last eight months of the year. However, she paid for more than half of the cost of keeping up the household. Her spouse does not want to file jointly. What filing status must she use when filing her tax return? She wants to obtain the maximum legal benefit. a. Married filing separately. b. Single. c. Qualifying widow(er). d. Head of household.
d.
tax credits
deductions from a taxpayer's tax liability that directly reduce his or her taxes due (rather than reducing taxable income)
1.Administrative tax authority takes precedence over statutory tax authority.
false
1.Alimony may be paid in either cash or property, as long as the payments are made on a regular basis to a non-live-in ex-spouse. True or False?
false
1.Holiday turkeys given to employees are included in gross income. True or False?
false
1.Self-employed individuals are allowed to take a for AGI deduction for up to 80% of the cost of their self-employed health insurance premiums. True or False?
false
1.Taxpayers pay all of their tax liability when they file their tax returns.
false
1.You must meet one of these four tests to be a qualifying relative: Not a qualifying child test, relationship or member of the household test, gross income test, and support test. True or False?
false
2.A qualifying relative can earn up to $12,000 for the year 2019. True or False?
false
2.For payments to qualify as alimony, the couple must be legally divorced at the time payments are made. True or False?
false
3.A surviving spouse who qualified as married filing jointly when the spouse died can file as a qualifying widow(er) for the next two years as long as the surviving spouse pays for more than half the cost of keeping up a household and does not remarry. True or False?
false
3.Average tax rate and marginal tax rate mean the same thing.
false
Complex tax returns do not follow the basic (or simplified) income tax formula
false
2.Unemployment compensation is reported to the taxpayer on a Form ______.
form 1099-g
Special Test for Qualifying Child of more than 1 taxpayer
if the child meets the 4 tests and can be qualifying child for more than 1 taxpayer, only 1 can claim the exemption.
Standard deduction 2
increases for people who are age 65 or older or blind (if they are both they can get the 2 standard deductions) - if a taxpayer can be claimed as a dependent by another taxpayer, the standard deduction is limited to the the higher of $1100 (after that amount you pay taxes), or the taxpayer's earned income plus $350
Unemployment compesation
is a 100% taxable
A High Deductible Health Plan (HDHP)
is a health plan with specified minimum deductible amounts and a maximum annual deductible and out-of-pocket expense limitation.
health savings account (HSA)
is a tax-exempt savings account used for qualified medical expenses. •It can be used for the expenses of the account holder, spouse, and dependents. In general, qualified taxpayers can take a for AGI deduction for contributions to the HSA.
Moving Expense Deduction
is allowed only to members of the U.S. Armed Forces, or their spouse or dependents, on active duty. If a member of the U.S. Armed Forces is on active duty and moves because of a permanent change of station, they can deduct their unreimbursed moving expenses.
Realization
is the process of converting a noncash resource into cash or right to cash
box 5
is the the net benefits.
Social security benefits
it used to be tax free, now part of the social security benefits may be taxable. up to 85% of your social security income is taxable.
Qualifying Relative
must meet four specific tests: •Not a qualifying child test •Relationship or member of household test (they have to live there the enire year) •Gross income test (Cannot have gross income equal or greater than $4,200) -Support test (must provide over 50% of dependent's support) - if you have people living with you, they are not related to you, and you support them (gross income less than 4,200)
Support test
must provide more than half of the kid support of actual child (not grandchild, for example) are excluded from support computation
1.Self-employment tax is calculated on the ____ earnings of the business.
net
the standard deduction is the sum of...
of the basic standard deductioin and the additional standard deduction (both components depend on filing status and are subject to inflation adjustments)
The federal income tax system is an example of a ________ tax structure
progressive
To be eligible to fund an HSA, a taxpayer must be __________, or an employee (or spouse) of an employer who maintains a high deductible health plan, or an employee of a company that has no health coverage and has purchased a high-deductible policy on his or her own
self-employed
What are the five types of filing status?
single married filing a joint return married filing a separate return head of household Qualifying widow(er) with dependent child
marginal tax rate
the rate of tax that will be paid on the next dollar of income.
To be eligible for an health savings account (HSA)
the taxpayer must be self-employed, or an employee (or spouse) of an employer with a high deductible health plan, or an employee of a company that has no health coverage and has purchased a high-deductible policy on his or her own. •Taxpayers cannot have other health insurance except for coverage for accidents, disability, dental care, vision care, long-term care, or workers' compensation
3. What qualifications are necessary to file as head of household?
the taxpayer must be unmarried at the end of the tax year, be a U.S. citizen or resident throughout the year, not be a qualifying widow(er), and maintain a household that is the principal place of abode of a qualifying person for more than half the year or pay more than half the costs of maintaining a separate household for the taxpayer's mother or father if the mother or father qualifies as a dependent of the taxpayer. Temporary absences, such as attending school do not disqualify the person under this section.
Total tax liability
the total amount the taxpayer must pay to the government for the tax year.
average tax rate
total tax/taxable income
1.The marginal tax rate is the rate of tax imposed on the next dollar of taxable income.
true
2.An individual can exclude certain income from taxation even though a transaction that has economic benefits has occurred. True or False?
true
2.Fraud on a tax return can also lead to criminal charges. True or False?
true
2.If someone purchases a debt instrument (such as a bond) from an issuer for an amount less than par value, the transaction creates original issue discount (OID). True or False?
true
2.The concept of Adjusted Gross Income (AGI) is important because many deductions and credits reported on the tax return are computed based on the amount shown as AGI? True or False?
true
3.All tax legislation must pass both the House of Representatives and the Senate and be signed by the president of the United States in order to become law.
true
3.The goal of the alimony recapture rules is to properly define the substance of payments made to a former spouse to ensure proper tax treatment. True or False?
true
"qualified" educational expenses
tuition, fees, books, supplies, equipment, room, board, transportation
Only certain types of income are reported on the face of page 2,Form 1040EZ. They are
wages and interest
George and Debbie were legally married on December 31, 2019. Can they file their 2019 income tax return using the status of married filing jointly? Why or why not? What other filing status choices do they have, if any?
yes they can also file married filing a separate return
failure to pay tax penalty
•0.5 percent per month or fraction of a month, not to exceed 25 percent
statutory sources of tax authority
•16th amendment to the U.S. Constitution •Internal Revenue Code (IRC) •Committee reports from tax law process
Penalties for failure to file a tax return(you need an extension)
•5 percent per month or fraction of a month, not to exceed 25 percent •Any income tax return not filed within 60 days of its due date is subject to a minimum penalty of the lesser of $215 or the amount of tax required on the return
•Failure to pay estimated income tax penalty
•Applies if taxpayer fails to pay during the year a minimum of: 90 percent of the current year tax liability, or 100 percent of the prior year's tax liability if the taxpayer's AGI in the prior year is less than $150,000.
Fraud penalty
•Applies to the understatement of tax that is attributable to fraud •The rate is 75 percent it can be a crimminal act (jail) (the irs needs to demonstrate there was an intend of fraud)
Accuracy-related penalty
•Applies when there is negligence or any substantial understatement •The rate is 20 percent of the tax due (demonstrate a reasonable use, they can forgive penalties but not interests)
Taxability of dividends
•Dividends are distributions to shareholders, thus, income that must be reported on the tax return •Qualified dividends (1) are made from the earnings and profits of the payer corporation and (2) are from domestic corporations or qualified foreign corporations
three additional conditions must be present when the transaction occurs
•Economic benefit of the transaction •Conclusion of the transaction (completion of a transaction) •Income from the transaction must not be tax-exempt income
Original Issue Discount (OID)
•Equal to the difference between the acquisition price and the maturity value •The holder must report part of the OID as income every year
Dependent Taxpayer Test
•If the dependent can be claimed by someone else, then the taxpayer cannot claim this person as a dependent
Discounts provided to employees for products or services normally sold by the business
•In case of products, the discount cannot exceed the gross profit percentage •In case of services, the maximum discount is 20 percent of the normal selling price
Constructive Receipt (is income)
•Income is reported in the year the taxpayer receives the right to control the income rather than the year in which it's earned •Receipt of property or services will trigger income recognition
taxability of interest
•Interest from banks, savings and loans, or credit unions is reported on a 1099-INT and is taxable •Interest earned on Series E and EE U.S. Savings Bonds is taxable but can be reported gradually on an annual basis or fully at maturity •Some interest received is tax-exempt if the debt is issued by a state, U.S. possession, or subdivision thereof
•Nontaxable fringe benefits with certain limitations
•Life insurance •Premiums for coverage up to $50,000 •Educational assistance •Up to $5,250 may be reimbursed to the employee •Dependent care assistance •Up to $5,000 of exclusion, but cannot exceed earned income of the employee
failure to file a tax return and to pay tax
•Maximum amount is 5 percent per month or fraction of a month, not to exceed 25 percent when both penalties apply to the same situation
Taxability of savings bond interest
•Not taxable if used to pay qualified higher education expenses for the taxpayer, spouse or dependent children •Full exclusion allowed if the education expenses paid exceed the redemption amount •Limitation applies if modified AGI exceeds $121,600 on a joint return or $81,100 on other returns
Taxability of refund from the state and local government
•Refunds are taxable if, in the prior tax year, the refund was deducted as an itemized deduction •The taxable amount is: The lesser of (a) the amount received, (b) the amount deducted on Schedule A, or (c) the amount by which the itemized deductions exceed the standard deduction
Income Recognition for Tax Purposes
•Similar to the recognition for accounting purposes •Income must be realized and earned
•Other nontaxable income:
•Some of these items have certain requirements or limitations that must be met: •Scholarships and fellowships •Qualified tuition program (QTP) withdrawals •Life insurance proceeds •Gifts and inheritances •Compensation for sickness or injury •Child support •Welfare •Employer-provided adoption assistance
Three types of primary tax authority:
•Statutory sources •Administrative sources •Judicial sources
Judicial sources of tax authority
•Tax Court •U.S. District Court •U.S. Court of Federal Claims
•OID is not applicable to:
•Tax-exempt debt •U.S. Savings Bonds •Debt with a maturity of 1 year or less on the date of issue •Any obligation issued by a natural person before March 2, 1984 •Non-business loans of $10,000 or less between natural persons
Joint Return Test
•The person claimed as a dependent cannot file a joint return with his or her spouse, unless a return is filed only to claim a refund and there is no tax liability on the return (tax liability: money you owe to the irs) - you cannot claim yourself if you are claimed as dependant
Interest Charged on Assessments
•The rate charged is the federal short-term rate plus 3 percentage points -when the taxpayer still owes after the due date the irs will charge interest and they must also pay interest if they dont pay you in time. extensions are to file taxes not to pay them
•Erroneous claim for refund or credit
•The rate is 20 percent on the disallowed amount of the claim if the claim for refund or credit of income filed is found to be excessive. •Not applicable if the fraud or the accuracy-related penalty has been assessed
Regressive tax structure
•The tax rate decreases as the tax base increases. •Example is social security tax system
Progressive tax structure:
•The tax rate increases as the tax base increases.
Proportional tax structure:
•The tax rate remains the same regardless of the tax base. •Example is state or local sales taxes
Administrative sources of tax authority
•Treasury Regulations (IRS Regulations) •Revenue Rulings •Revenue Procedures •Private Letter Rulings •IRS Notices
Citizen or Resident Test
•be a U.S. citizen, resident, or national •be resident of Canada or Mexico •be an adopted child of the taxpayer if the child is a member of the taxpayer's household all year and the taxpayer is a U.S. citizen or national
