TAX3001 : Federal Income Tax - UNF Summer 2018 (CH 01, 02, 04, 05)

CH 2 What is the Standard Deduction for *Single* taxpayers?

$12,000

CH 2 What is the Standard Deduction for *Head Of Household* taxpayers?

$18,000

CH 2 What is the Standard Deduction for *Married Filing Joint* taxpayers?

$24,000

CH 2 What is the Standard Deduction for *Surviving Spouse* taxpayers?

$24,000

CH 5 Problem: In January, Gram purchased an annuity for $99,000. The annuity pays her $10,000 per year for the next 15 years. How much of each $10,000 payment should Gram include in her gross income?

$3,400 because the exclusion ratio is $99,000/$150,000 or 66 percent

CH 2 Question: What are the 3 *purposes* of Regulations?

(1) *Interpretive* Regulations *•* The Treasury's interpretation of the law (2) *Procedural* Regulations *•* Explains the Treasury department's procedures in administering the law (3) *Legislative* Regulations *•* *Rarest type* *•* Issued when Congress directs the Treasury Department to create regulations *to specifically address a certain area of the tax law* *•* Has *more weight than interpretive and procedural regulations*

CH 2 Question: What are the 3 *forms* of Regulations?

(1) *Proposed* Allows time for public comment (2) *Temporary* Has a limited life of 3 years and carry the same weight as final regulation (3) *Final* Regulations are issued in their final form

CH 1 Question: What are the 3 *requirements* for a tax?

(1) A Payment Is Required (2) Imposed By A Government (3) Not Directly Tied To A Benefit Received

CH 2 Question: What are 2 types of *tax services* used in *tax research*?

(1) Annotated (2) Topical

CH 5 Question: What are the 2 Accounting Methods?

(1) Cash Method (2) Accrual Method

CH 2 Question: What are the 3 types of audits?

(1) Correspondence Examinations (2) Office Examinations (3) Field Examinations

CH 5 Question: What are the 3 primary components of gross income?

(1) Economic Benefit (2) Realization Principle (3) Income Recognition

CH 2 Question: What are the 5 basic parts of an *internal research memo*?

(1) Facts (2) Issues (3) Authority List (4) Conclusion (5) Analysis

CH 4 Question: What are 3 *tax related items* affected by the filing status?

(1) Tax Rate (2) Standard Deduction Amount (3) AGI Phase-Out Thresholds

CH 2 What are 2 reasons to file taxes, even if your income is less than the required minimum?

(1) To *obtain a refund* of overpaid taxes (2) To begin the *Statute of Limitations*

CH 5 Question: What are 2 reasons why Congress allows items to be excluded or deferred?

(1) To *subsidize* or *encourage* particular activities (2) To *mitigate inequity*

CH 2 Question: What are the 3 *Trial-Level Courts*?

(1) U.S. Tax Court (2) U.S. District Court (3) U.S. Court of Federal Claims

CH 5 Question: When do taxpayers recognize income?

(1) When an economic benefit is received (2) When income is realized (3) If the tax law does not provide for exclusion or deferral

CH 2 Question: What is the Statute of Limitation's length for *understated* income?

*6 years* for income understated by 25% or more

CH 4 Define Term: Qualifying Child: *Support Test*

*Applicable to parents only* Child must not pay for *more that half* of own support Scholarships do not apply to the support test

CH 4 Define Term: *Qualified Widow (Surviving Spouse)*

*Available two years following death of spouse* Can't remarry Must maintain household for dependent child

CH 2 Question: What offers the *best clarification* of a code section recently enacted by *Congress*?

*Committee Reports* from: *•* The House Ways and Means Committee *•* The Senate Finance Committee *•* The Joint Conference Committee

CH 2 Define Term: *Civil Penalties*

*Most common* type of penalties Generally in monetary penalties Imposed when tax practitioners or taxpayers violate tax statutes without reasonable cause

CH 2 Define Term: *Primary Tax Law Authorities*

*Official sources* of the tax law

CH 2 Choose: The following are examples of (secondary/primary) tax law authorities. 1. Legislative Branch 2. Judicial Branch 3. Executive / Administrative Branch

*Primary* Tax Law Authorities

CH 2 Question: How does the *Treasury* administer tax laws and how are they weighted?

*Regulations* are the Treasury Department's official interpretation of the Internal Revenue Code and have the *highest authoritative weight*.

CH 4 Define Term: *Personal Exemptions*

*SUSPENDED as of 2017 Tax-Reform*

CH 5 Define Term: *Alimony*

*SUSPENDED as of 2017 Tax-Reform*

CH 2 Choose: The following are examples of (secondary/primary) tax law authorities. 1. Tax Research Services 2. Tax Articles From Professional Journals & Law Reviews 3. Newsletters 4. Textbooks

*Secondary* Tax Law Authorities

CH 5 Define Term: *Prizes and Awards*

*Taxable* *Exceptions*: (1) Awards for scientific, literary, or charitable achievement and transferred to a qualified charity (2) Awards for employee length of service or safety achievement ($400 non-cash limit per employee per year) (3) Awards to Team USA athletes from U.S. Olympic Committee on account of their competition in Olympic and Paralympic games (AGI limit applies)

CH 5 Define Term: *Social Security Benefits*

*Taxable* up to 85 percent of Social Security benefits in gross income Dependent On: (1) Filing Status (2) Social Security Benefits (3) Modified AGI

CH 2 Define Term: *Secondary Tax Law Authorities*

*Unofficial sources* and tax authorities that interpret and explain the laws created by the primary sources.

CH 2 Define: *Revenue Rulings*

*•* *Less authoritative weight* *•* Provides a *more detailed* interpretation of the Code *•* Addresses the application of the Code and regulations to a *specific factual situation*

CH 2 Define: *Letter Rulings*

*•* *Less authoritative* *•* *More specific than revenue rulings and regulations*

CH 2 Question: How does the *I.R.S.* administer tax laws and how are they weighted?

*•* *Revenue Rulings* *•* *Revenue Procedures* *Second in administrative authoritative weight*, after regulations

CH 1 Define Term: *Explicit Tax*

*•* A tax directly imposed by a government unit *•* Easily quantified

CH 2 Define Term: *Correspondence Examinations*

*•* Conducted by *mail* and are generally limited to 1 or 2 items on the return *•* *Most common* audit

CH 2 Define Term: *Office Examinations*

*•* Conducted in the local *IRS office* and tends to be broader in scope *•* *Second most common* audit

CH 2 Define: *Revenue Procedures*

*•* Explains I.R.S. practices and procedures in administering tax law in *great detail*

CH 2 Define Term: *Field Examinations*

*•* Held at the *taxpayer's place of business* and can last months to years *•* *Least common* audit

CH 5 Define Term: *Earned Income*

*•* Income Income derived from labor *•* Generated by efforts of the taxpayer

CH 5 Define Term: *Unearned Income*

*•* Income derived from property *•* Income from the sale of an asset

CH 5 Define Term: *Constructive Receipt*

*•* Income is realized and recognized when it is actually or constructively received *•* Deemed to occur when the income is credited to the taxpayer's account *•* Applies where the taxpayer has *not* yet actually *received income*

CH 5 Define Term: *Claim of Right*

*•* Income recognized when there are no restrictions on use of income *•* *No obligation to repay* *•* Applies when the taxpayer has *received* an item of *income*

CH 2 Define Term: *U.S. District Court*

*•* Local Court *•* Tax *Generalists* *•* The only court that provides a jury trial *•* Pays Tax Beforehand *•* Appeals to the circuit court *based on the taxpayer's residence*

CH 2 Define Term: *U.S. Tax Court*

*•* National Court *•* Tax *Experts* *•* Small Claims Division: Hears Claims < $50,000 *•* Does *Not* Pays Tax Beforehand *•* Appeals to the circuit court *based on the taxpayer's residence*

CH 2 Define Term: *U.S. Court of Federal Claims*

*•* National Court *•* Tax *Generalists* *•* Pays Tax Beforehand *•* Appeals to *U.S. Circuit Court of Appeals for the Federal Circuit*

CH 2 Define: *Private Letter Ruling*

*•* The IRS's application of the Code and other tax authorities to a *specific transaction and taxpayer* *•* Issued in response to a taxpayer's request *•* Common for transactions with *large tax implications*

CH 1 Define Term: *Implicit Tax*

*•* The reduced rates of pretax return that a tax-favored asset produces *•* Difficult to quantify

CH 4 Define Term: *Qualifying Person*

1. *Qualifying Child*: 2. *Qualifying Relative who is Father or Mother*: 3. *Qualifying Relative who is NOT Father or Mother*: Lives with taxpayer for more than half of the year Qualifies as a dependent Must be related through family

CH 2 Question: What are the 3 *primary* tax law authorities?

1. *Statutory Sources* (Internal Revenue Code) 2. *Judicial Sources* (The Courts) 3. *Administrative Sources* (Treasury & IRS Pronouncements)

CH 1 Rank the following type of taxes from most significant to least significant for FEDERAL taxes: Transfer Tax Employment/Unemployment Tax Income Tax Excise Tax

1. Income Tax 2. Employment/Unemployment Tax 3. Excise Tax 4. Transfer Tax Most Significant FEDERAL Tax: *Income Tax*

CH 1 Question: What are the 3 different ways to measure tax rates?

1. Marginal Tax Rate 2. Average Tax Rate 3. Effective Tax Rate

CH 1 Question: What are the *5 Filing Status'*?

1. Married Filing Joint 2. Surviving Spouse 3. Head of Household 4. Single 5. Married Filing Separately

CH 4 Define Term: *Abandoned Spouse*

1. Married at year end 2. Does not file a joint return 3. Pays for more than half of the support for a qualifying child for more than half of the year 4. Has lived apart from spouse for last 6 months

CH 4 Question: What are the 3 Tie-Breaking rules for Qualifying Children?

1. Parents first 2. Days living with each parent if parents living apart 3. Higher AGI gets exemption

CH 1 Question: What are the 3 types of *tax rate structures*?

1. Proportional (The "Flat Tax") 2. Progressive 3. Regressive

CH 1 Question: What are 2 types of property taxes?

1. Real Property Taxes 2. Personal Property Taxes

CH 4 Question: What tests must be passed to be a *Qualifying Child*?

1. Relationship Test 2. Age Test 3. Residence Test 4. Support Test

CH 4 Question: What tests must be passed to be a *Qualifying Relative*?

1. Relationship Test 2. Support Test 3. Gross Income Test

CH 1 Rank the following type of taxes from most significant to least significant for STATE taxes: Income Tax Property Tax Excise Tax Sales/Use Tax

1. Sales/Use Taxes 2. Property Tax 3. Income 4. Excise Most Significant STATE Tax: *Sales Tax*

CH 1 Question: What are the 2 types of *government* taxes?

1. State Taxes 2. Federal Taxes

CH 1 Question: What two factors are needed to calculate the income tax due?

1. Tax Base 2. Tax Rate

CH 2 Question: What 2 factors depend on the taxpayer's filing status?

1. The Standard Deduction Amount 2. The Tax Rate.

CH 2 Question: Which of the following factors depend on the taxpayer's filing status? 1. The Standard Deduction Amount 2. The Tax Base 3. The Tax Rate. 4. The Tax Rate Structure

1. The Standard Deduction Amount 3. The Tax Rate.

CH 2 Question: Bill and Mercedes file their 2013 federal tax return on September 6, 2014, after receiving an automatic extension to file their return by October 15, 2014. When does the statute of limitations end for their 2013 tax return?

3 years after the later of the actual filing date and the original due date September 6, 2017

CH 2 What is the penalty for failing to file a tax return?

5% of taxes due for each month or partial month that the return is late Maximum Penalty: ~25% of the tax owed

CH 4 Define Term: *AGI*

????? Itemized deduction thresholds, phase outs for A.G.I. deductions & tax credits.

CH 1 Question: Federal or State Income Taxes are examples of which tax structure?

A Progressive Tax Rate

CH 1 Question: Sales Tax is an example of which tax structure?

A Proportional Tax Rate

CH 1 Question: Social Security or Unemployment Taxes are examples of which tax structure?

A Regressive Tax Rate

CH 2 Define Term: *Stare Decisis*

A court will rule consistently with (a) its previous rulings (unless overruled) (b) the rulings of higher courts with appellate jurisdiction (the courts their cases are appealed to) Presents a special problem for the tax court because it appeals to different circuits based on the taxpayer's residence

CH 4 Define Term: *Alternative Minimum Tax (AMT)*

A minimum tax based on the taxpayer's total AGI. *Post-2017 Tax Reform*: Increased AMT Exemption Amounts: $109,400 for MFJ or Surviving Spouses $70,300 for Single $54,700 for MFS Increases Phase-Out of Exemption Amounts: $1,000,000 for MFJ or Surviving Spouses $500,000 for Single and MFS

CH 1 Define Term: *Tax*

A payment required by a government Unrelated to any specific benefit or service received from the government

CH 4 Define Term: *Preferential Tax Rate*

A preferred tax rate to *relieve the effect of double taxation* Applies to *Qualified Dividends* and *Long Term Capital Gains*

CH 5 Define Term: *Annuities*

A stream of equal payments over time

CH 1 Define Term: *Excise Tax*

A tax based on quantity purchased

CH 1 Define Term: *Ad Valorem Tax*

A tax based on the *fair market value* of property

CH 1 Define Term: *"Sin" Tax*

A tax on goods that are deemed to be socially undesirable

CH 5 Define Term: *Realization Principle*

A transaction with *another party* The transaction results in a *measurable change*

CH 5 Question: Corporations must use which accounting method?

Accrual Method

CH 2 Define Term: *Tax Treaties*

Agreements negotiated between countries that describe the tax treatment of entities subject to tax in both countries.

CH 2 Question: What does Code Title 26 contain?

All codified laws of the United States

CH 5 Define Term: *Recognized Income*

All income received - *Excluding* deferred and excluded income

CH 5 Define Term: *Realized Income*

All income received - *Including* deferred and excluded income

CH 5 Define Term: *Deferral Provisions*

Allow taxpayers to temporarily exclude (defer) the recognition of certain types of realized income

CH 2 Question: What does the 16th amendment do?

Allows Congress to tax income directly.

CH 5 Define Term: *Like-Kind Exchanges*

An asset that is traded for a similar asset

CH 4 Define Term: *Dependency Exemptions*

Applies for qualifying child or qualifying relative Must be a U.S. Citizen or of Canada or Mexico Must not file joint return with spouse

CH 2 When are individual tax returns due?

April 15th or the next weekday if the 15th falls on a weekend

CH 2 Define Term: *Annotated Tax Services*?

Arranged by Code Section Includes: *•* The code section history *•* Copies of committee reports *•* Copies of all the regulations issued for the specific code section *•* An unofficial explanation of the code section *•* Brief summaries (called annotations) of relevant court cases, revenue rulings, revenue procedures, letter rulings, etc. that address issues specific to the code section.

CH 2 Define Term: *Topical Tax Services*?

Arranged by Topic *•* Taxable Forms of Income *•* Tax-Exempt Income *•* Trade or Business Expenses *•* Identify tax issues that relate to each topic *•* Explains and cite authorities relevant to the issue *•* Beginning tax researchers often prefer topical services, as they generally are easier to read

CH 2 Question: What does the U.S. Constitution state in regards to bills to raise revenue?

As required by the U.S. Constitution (Article 1, Section 7), *"All bills for raising revenue shall originate in the House of Representatives."*

CH 1 Define Term: *Substitution Effect*

As tax rates increase... *people will substitute nontaxable activities* because the marginal value of taxable ones has decreased

CH 1 Define Term: *Income Effect*

As tax rates increase... *people will work harder* to maintain same after-tax income

CH 1 Choose: For Proportional Taxes, the rate (increases/decreases/remains the same) as the base increase.

As the base increases, the *remains the same*. This is a flat rate.

CH 1 Choose: For Regressive Taxes, the rate (increases/decreases/remains the same) as the base increase.

As the base increases, the marginal rate *decreases*.

CH 1 Choose: For Progressive Taxes, the rate (increases/decreases/remains the same) as the base increase.

As the base increases, the marginal rate *increases*.

CH 1 Define Term: *Sufficiency*

Assesses how much tax revenue must be generated Makes sure that the tax system provides these revenues

CH 5 Question: Who recognizes income for capital?

Assignment of Income Doctrine: The owner of the income producing asset

CH 5 Question: Who recognizes income for services?

Assignment of Income Doctrine: The person who performed the service

CH 1 Question: What is the *Average Tax Rate* useful for?

Budgeting Tax Expenses

CH 5 Define Term: *Schedule C*

Business Income Self-Employed Income

CH 5 Define Term: *Schedule D*

Capital Gains

CH 5 Define Term: *Exclusion Provisions*

Certain types of income Congress excludes or defers from Gross Income, *stated specifically* within the Internal Revenue Code

CH 4 Define Term: Qualifying Child: *Relationship Test*

Child must be a descendant of the tax payer Includes: Child, grandchild, sibling, niece, nephew

CH 1 Question: What is the *Effective Tax Rate* useful for?

Comparing Relative Tax Burdens

CH 2 Question: What are the *Statutory Sources* and what do they do?

Consists Of: Congress and the Internal Revenue Code Perform the basic steps in *tax research* and *evaluate various tax law sources* when faced with ambiguous statutes. The *Constitution is the highest authority in the US, but has very little tax law*

CH 2 Question: What are the *Administrative Sources* and how do they administer tax laws?

Consists Of: The Treasury and I.R.S. Charged with *administering* and *interpreting* the tax laws. The I.R.S. reports to the Treasury Department The Treasury Department reports to the Executive Branch

CH 2 Question: What are the *Judicial Sources* and what do they do?

Consists Of: U.S. Supreme Court (*Highest Authority*) U.S. Circuit Courts of Appeals U.S. District Court (*Trial-Level Court*) U.S. Tax Court (*Trial-Level Court*) U.S. Court of Federal Claims (*Trial-Level Court*) Tasked with the ultimate authority to *interpret* the Internal Revenue Code and *settle disputes* between taxpayers and the IRS.

CH 2 Define Term: *Joint Conference Committee*

Consists of members of: *•* The House Ways and Means Committee *•* The Senate Finance Committee

CH 4 Define Term: "Deductions *Above* The Line"

Deductions *for* AGI Tend to relate to *business activities* and certain *investment activities* *Always reduces taxable income dollar for dollar*

CH 4 Define Term: "Deductions *Below* The Line"

Deductions *from* AGI Tend to be *personal* in nature. Includes: Itemized Deductions *OR* Standard Deduction (whichever is greater) Dependency Exemptions

CH 4 Question: According to the IRC, the following (included/excluded/deferred) from taxes: *Installment Sales*

Deferred

CH 4 Question: According to the IRC, the following (included/excluded/deferred) from taxes: *Like-Kind Exchanges*

Deferred

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Like-Kind Exchanges*

Deferred

CH 1 Define Term: *Tax Base*

Defines what is actually taxed *Expressed in monetary terms*

CH 5 Define Term: *Taxable Amount Of Annutiy*

Depends on the amount invested as per the annuity exclusion ratio

CH 4 Define Term: *Character of Income*

Determines how the income is treated for tax purposes, including, potentially, the rate at which the income is taxed

CH 5 Define Term: *Qualified Employee Discount* AKA *Bargain Purchase*

Discounts offered to an employee from the employer Discounts *greater* than the employer's gross profit percentage are taxable *Products*: Discounts > 15% are taxable *Services*: Discounts > 20% are taxable

CH 5 Define Term: *Schedule B*

Dividend and Interest Income

CH 4 Define Term: *Capital Asset*

Everything *Except*: 1. Accounts Receivable 2. Inventory 3. Asset Used In Trade Or Business

CH 4 Question: According to the IRC, the following (included/excluded/deferred) from taxes: *Gifts & Inheritance*

Excluded

CH 4 Question: According to the IRC, the following (included/excluded/deferred) from taxes: *Life Insurance Proceeds*

Excluded

CH 4 Question: According to the IRC, the following (included/excluded/deferred) from taxes: *Municipal Bond Interest*

Excluded

CH 4 Question: According to the IRC, the following (included/excluded/deferred) from taxes: *Profit On Principal Residence*

Excluded

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Employee Purchased* *Disability Insurance* (Wage Replacement Insurance)

Excluded

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Health Care Reimbursement*

Excluded

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Life Insurance Premiums Under $50,000*

Excluded

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Municipal Bonds*

Excluded

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Payments Associated with Personal Injury*

Excluded

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Workers' Compensation*

Excluded

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Education-Related Expenses*

Excluded Up to $5,250/year

CH 2 Define Term: *Action on Decision*

Explains the background reasoning behind an IRS acquiescence or non-acquiescence

CH 1 True or False: Married Filing Joint and Married Filing Separately filing status' are treated the same

False

CH 1 True or False: Payment for a driver's license is considered a tax

False

CH 1 True or False: Payment for a government required house appraisal is considered a tax

False

CH 2 True or False: Extensions delay the due date for tax payments

False Extensions allow taxpayers delay filing the tax return. Tax payment dates are not extended.

CH 1 True or False: The Married Filing Separately filing status has better tax advantages than the Married Filing Joint filing status

False Note: Married Filing Separately generally has the worst rates. Couples tend to file as MFS for non-tax reasons.

CH 1 Problem: Given the following tax structure, if Milwah made a salary of $10,000 with taxes paid of $600 and Shameika made $50,000, what minimum tax would need to be assessed on Shameika to make the tax progressive with respect to average tax rates?

First figure the average tax rate using the information provided for Milwah which is 6%. ($600) / ($10,000) = 0.06 = 6% Next, figure Shameika's taxes due at the average tax rate which is $3,000. (0.06) / ($50,000) = $3,000 She would need to pay *more* than $3,000 in order for the tax structure to be progressive in respect to effective tax rates.

CH 1 Problem: Chuck, a *single* taxpayer, earns $75,000 in taxable income. How are federal taxes figured on $75,000 of taxable income?

Follow the *Post-2017 Tax Reform* Individual Tax Rate Schedule for *single* taxpayers. Single Individuals: • 10% (Taxable income not over $9,525) • 12% (Over $9,525 but not over $38,700) • 22% (Over $38,700 but not over $82,500) + ($9,525)(0.10) + ($38,700 - $9,525)(0.12) + ($75,000 - $38,700)(0.22) ($952.50) + ($3,501.00) + ($7,986.00) Total Income Tax = *$12,439.50*.

CH 5 Define Term: *Discharge Of Indebtedness*

Forgiveness of a taxpayer's debt or obligation The amount of debt relief is *included in gross income* Can exclude debt relief from gross income up to amount of insolvency

CH 4 Question: Individuals report taxable income to the IRS on which form?

Form 1040

CH 2 Question: How long does the Statute of Limitations remain open?

Generally ends *3 years* from the later of... (1) the date the tax return was actually filed OR (2) the tax return's original due date

CH 4 Define Term: "*Gross Income*", as defined in 26 U.S. Code section 61

Gross Income includes all income from whatever source, derived unless excused by law, whether in money, property, or services

CH 2 Define Term: *Non-Acquiescence*

Guidance for how the IRS intends to respond to a court case loss Alerts taxpayers that the IRS plans to continue to litigate this issue

CH 2 Define Term: *Acquiescence*

Guidance for how the IRS intends to respond to a court case loss Indicates that the IRS has decided to "follow" the court's adverse ruling in the future Does *not* mean that the IRS agrees with the court's ruling Means that the IRS will no longer litigate this issue.

CH 4 Question: Assume Rodney and Anita *divorced last year*. During the current year, Braxton lives with Anita and Anita pays all the costs of maintaining the household for herself and Braxton. Under these circumstances, what is Anita's filing status for the current year?

Head of Household

CH 4 Question: Assume Shawn (Rodney's brother) lived with the Halls, but Shawn paid more than half the costs of maintaining a separate apartment that is the principal residence of his mother, Sharon, whose gross income is $1,500. Because Shawn provided more than half of Sharon's support during the year, and because Sharon's gross income was only $1,500, she qualifies as Shawn's dependent (as a qualifying relative). In these circumstances, what is Shawn's filing status?

Head of Household Shawn paid more than half the costs of maintaining a separate household that is the principal place of abode for his mother, and his mother qualifies as his dependent.

CH 1 Define Term: *Equity* (Fairness)

How the tax burden should be distributed across taxpayers

CH 1 Define Term: *Static Revenue Forecasting*

Ignores how taxpayers might alter activities in response to changes in tax laws Bases projected tax revenues on the existing state of transactions

CH 1 Define Term: *Regressive Tax Rate*

Imposes a *decreasing* marginal tax rate as the tax base increases.

CH 1 Define Term: *Proportional Tax Rate* (The "Flat Tax")

Imposes a constant tax rate throughout the tax base.

CH 1 Define Term: *Progressive Tax Rate*

Imposes an *increasing* marginal tax rate as the tax base increases.

CH 4 Question: According to the IRC, the following (included/excluded/deferred) from taxes: *Gross Income*

Included

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Employer Purchased* *Disability Insurance* (Wage Replacement Insurance)

Included

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Life Insurance Premiums Over $50,000*

Included

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Payments for Punitive Damages due to Negligence*

Included

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Selling Of Life Insurance Policy To Another Person*

Included

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Unemployment Insurance*

Included

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Gains From Gambling*

Included *Losses are deductible* up to the earnings, but only as an *itemized deduction*

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Gains* *From Personal Assets*

Included Losses are *not* deductible

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Foreign Earned Income Exclusion*

Included Roughly $100K is allowed to be excluded from gross income, when lived abroad for 330 days in 12 month period

CH 5 Define Term: *Flow-Through Entities*

Income earned by an S-Corp or Partnership that is taxed to the owners at the Individual level

CH 4 Define Term: *Deferred Income*

Income included in a subsequent tax year

CH 4 Define Term: *Excluded Income*

Income never included in taxable income Exclusions are *specifically specified* within the Internal Revenue Code

CH 1 Define Term: *Preferential Income*

Income that is taxed at a different (lower) rate

CH 5 Define Term: *Schedule A*

Itemized Deductions

CH 5 Define Term: *Non-Cash Items*

Items within an exchange that isn't cash *Taxable* at Fair Market Value

CH 1 Define Term: *Tax Rate*

Level of taxes imposed on the tax base *Expressed as a percentage*

CH 5 Define Term: *Insolvent*

Liabilities (including tax liabilities) exceed the taxpayer's assets

CH 4 Define Term: *Capital Losses*

Losses from the sale of an asset *Can deduct $3,000 against ordinary income* per year and carry any remaining losses forward onto subsequent years

CH 4 Define Term: *Married Filing Joint*

Married by or on the last day of the year Either spouse is fully liable for the entire amount of tax due

CH 4 Define Term: Qualifying Relative: *Relationship Test*

More broad than qualifying child test Must be a descendent or ancestor

CH 2 Define Term: *Criminal Penalties*

Much *less common* than civil penalties These penalties are much higher and can include prison sentences

CH 4 Define Term: Qualifying Child: *Residence Test*

Must live in taxpayers home *more than half* the year or away at school or medical treatment.

CH 4 Define Term: Qualifying Relative: *Gross Income Test*

Must make less than personal exemption $4,050

CH 2 Question: What is the Statute of Limitation's length for a *fraudulent return*?

No Statute of Limitations

CH 5 Question: The following are examples of... Employee Benefits Educational Assistance Dependent Care Qualified Employee Discounts

Non-Taxable Fringe Benefits

CH 5 Define Term: *Imputed Income*

Offers an *indirect benefit* Examples - Low interest loan that is less that the federal or market rate from employer or bargain purchase / discount

CH 2 Question: What is the Statute of Limitation's length for a return that was *never filed*?

Open Indefinitely

CH 2 Define Term: *Writ of Certiorari*

Orders a lower court to deliver its record in a case so that the higher court may review it

CH 5 Define Term: *Accelerated Death Benefit*

Payable to insured when diagnosed with terminal illness with less than a 24 month life expectancy

CH 4 Define Term: *Tax Prepayments*

Payments already made toward tax liability: Includes: Income taxes withheld from wages by employer Estimated tax payments made during the year Overpaid taxes in prior year and applied toward current year's liability *If prepayments exceed tax liability after credits, taxpayer receives a refund*

CH 1 Question: Boats, private planes, and stocks or bonds are examples of which type of property?

Personal Property

CH 2 Question: Is the following a primary or a secondary source? Internal Revenue Code

Primary

CH 2 Question: Is the following a primary or a secondary source? Supreme Court Opinion

Primary

CH 2 Question: Is the following a primary or a secondary source? Treasury Regulations

Primary

CH 2 Define: *Committee Report*

Produced By: *•* The House Ways and Means Committee *•* The Senate Finance Committee *•* The Joint Conference Committee Explains: *•* Current Tax Law *•* Proposed Changes *•* Reasons For The Change Considered "statutory" sources of the tax law Useful in interpreting tax law changes and understanding Congressional intent

CH 4 Define Term: *Capital Gain*

Profit from the sale of an asset

CH 4 Question: Assume that last year Rodney passed away, and during the current year Anita did *not* remarry but maintained a household for Braxton and Tara, her dependent children. Under these circumstances, what would Anita's filing status be?

Qualifying Widow

CH 1 Question: Land, buildings, and permanent improvements are examples of which type of property?

Real Property

CH 5 Define Term: *Income Recognition*

Realized Income, *excluding* Deferred Income and Excluded Income

CH 5 Define Term: *Economic Benefit*

Receiving something of value

CH 5 Define Term: *Tax Benefit Rule*

Recovery of a previously deducted item is considered gross income based on the benefit provided in a previous year *Taxable up to the extent of the benefit received*

CH 4 Define Term: *Tax Credits*

Reduce tax liability dollar for dollar

CH 4 Define Term: *Married Filing Separate*

Releases joint liability Must take the same deduction as their spouse, whether itemized or standard deduction

CH 1 Problem: Fergie has the choice of investing in a State of New York bond at 5% and a Surething bond at 8%. Assuming that both bonds have the same nontax characteristics and that Fergie has a 30% marginal tax rate, in which bond should she invest?

Remember: *Municipal Bonds are Tax-Exempt* Fergie's after-tax rate of return on the *tax exempt State of New York bond* is 5%. Fergie's after-tax rate of return on the Surething bond is 5.6%. (Interest Income) - (Interest Income)(Marginal Tax Rate) = After Tax Rate on Bond (8.00) - (8.00)(0.30) = 5.60 She should invest in the 5.6% Surething bond due to the higher rate of return

CH 5 Define Term: *Schedule E*

Rent and Flow-Through Income

CH 4 Define Term: *Deductions*

Savings at a marginal rate

CH 2 Question: Is the following a primary or a secondary source? Article on Supreme Court Opinion

Secondary

CH 2 Question: Is the following a primary or a secondary source? RIA Federal Tax Coordinator

Secondary

CH 2 Question: Is the following a primary or a secondary source? Tax Article in USA Today

Secondary

CH 1 Define Term: *Municipal Bond*

Securities issued by the state or local authority. Interest income earned is *tax-exempt* since it is already taxed beforehand.

CH 2 Question: How is "The Code" (IRC) organization?

Segregated Into: *•* Subtitles *•* Chapters *•* Subchapters *•* Parts *•* Subparts *•* Sections The law is *referenced by its code section* Each section is further segregated to allow specific references/citation: *•* Subsections *•* Paragraphs *•* Subparagraphs *•* Clauses

CH 5 Question: Is the following is (included/excluded/deferred) from gross income? *Gain On Sale Of Principle Residence*

Single: Exclude up to $250,000 MFJ: Exclude up to $500,000 Usable once every 2 years *Qualifications*: Ownership Test Use Test

CH 5 Question: What is the Modified AGI required for Single, MFS, and MFJ taxpayers to be taxed for Social Security Benefits?

Single: Modified AGI > $25,000 MFS: Modified AGI > $32,000 MFJ: Modified AGI > $44,000

CH 1 Question: What are 5 ways to evaluate different tax systems?

Sufficiency Equity (Fairness) Certainty Convenience Economy

CH 1 Problem: Bill and Mercedes have $160,000 of taxable income and additional $10,000 of nontaxable income. Using the 2016 married-joint tax rates, what is their tax due, average tax rate, and effective tax rate? If they receive an additional $80,000 of taxable income, what is their marginal tax rate on this income?

Tax Due = $31,684.50, computed as: $31,684.50 = $29,752.50 + 28% × ($160,000 − $153,100) Average tax rate: 19.80% ($31,684.50 /160,000) Effective tax rate: 18.64% ($31,684.50 /170,000) Marginal tax rate: 28.42% ($54,417 − $31,684.50)/ ($240,000 − $160,000)

CH 1 Question: What is the *Marginal Tax Rate* useful for?

Tax Planning

CH 1 Define Term: *Marginal Tax Rate*

Tax rate that applies to the next additional increment of a taxpayer's taxable income

CH 1 Define Term: *Sales Tax*

Taxes on retail sales of goods and services

CH 1 Define Term: *Use Tax*

Taxes on the retail price of goods *•* Owned *•* Possessed *•* Consumed within a state that were not purchased within the state

CH 1 Define Term: *Unemployment Tax*

Taxes to fund temporary unemployment benefits for individuals terminated from their jobs without cause

CH 2 Who must file a tax return?

Taxpayer's whose gross income is *greater* than their: + Standard Deduction + Personal Exemption + Additional Deductions (Age 65+ or Blindness)

CH 1 Define Term: *Certainty*

Taxpayers should be able to determine... (1) *When* to pay the tax (2) *Where* to pay the tax (3) *How* to determine the tax

CH 1 Define Term: *Vertical Equity*

Taxpayers with *greater ability* to pay tax, *pay more* tax relative to taxpayers with a lesser ability to pay

CH 2 Question: What is the *second* highest tax authority, and *main statutory authority*?

The *Internal Revenue Code (IRC)* of 1986, also known as "The Code". All enacted changes made by Congress are incorporated into the IRC of 1986. The U.S. Constitution has the highest tax authority, above the IRC

CH 2 Define Term: *Internal Revenue Code*

The *main statutory authority*

CH 2 Define Term: *Standard Deduction*

The *minimum deduction allowed* on a tax return

CH 2 Question: What amendment(s) gave Congress the right to collect taxes?

The 16th Amendment

CH 2 Question: Why is the Committee Report a good source of clarification for new proposed sections of the code?

The House Ways & Means Committee and the Senate Finance Committee each write a report explaining: *•* Current Tax Law *•* Proposed Changes *•* Reasons For The Change

CH 1 Define Term: *Average Tax Rate*

The average level of taxation on each dollar of *TAXABLE* income

CH 1 Define Term: *Effective Tax Rate*

The average level of taxation on each dollar of *TOTAL* income

CH 1 Question: The state of Georgia recently increased its tax on a pack of cigarettes by $2.00. What type of tax is this? Why might Georgia choose this type of tax?

The cigarette tax is both considered an excise tax (i.e., a tax based on quantity purchased) and a "sin" tax (i.e., a tax on goods that are deemed to be socially undesirable). Georgia may choose this type of tax to discourage smoking and because sin taxes are often viewed as acceptable ways of increasing tax revenues.

CH 1 Problem: Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds. What is included as taxable income?

The city bond interest is not included in gross income. Taxable income is *$75,000*.

CH 2 Define Term: *The Golsen Rule*

The tax court will abide by the circuit court's rulings that has jurisdiction for a case The rule implies that the tax court may issue conflicting opinions in different circuits

CH 2 Question: Tax professionals are subject to various statutes, rules, and codes of conduct. What happens if a tax professional fails to comply with these statutes?

The tax professional can be admonished, suspended, or barred from practicing tax

CH 1 Define Term: *Economy*

The tax system should aim to *minimize compliance and administration costs* associated with the system

CH 1 Define Term: *Convenience*

The tax system should be designed to *collect taxes without additional hardships* to the taxpayer

CH 4 Define Term: Qualifying Relative: *Support Test*

The taxpayer claiming the exemption must pay *more than half* of own support.

CH 5 Define Term: *Ownership Test*

The taxpayer has owned the house for 2 of last 5 years

CH 5 Define Term: *Use Test*

The taxpayer has used the house as their *principle residence* for 2 of last 5 years

CH 2 Define Term: *Statute of Limitations*

The time in which the taxpayer can file an amended return The time the IRS can assess a tax deficiency

CH 1 Define Term: *Dynamic Revenue Forecasting*

Tries to predict possible responses by taxpayers to new tax laws

CH 1 True or False: Married Filing Joint and Surviving Spouse filing status' are treated the same

True

CH 1 True or False: Payment for hotel use of 1% of bill to pay for city projects is considered a tax

True

CH 1 True or False: Payment for rental car use of 3% of bill to pay for the roads is considered a tax

True

CH 2 True or False: The Failure-To-File Penalty does not apply if the taxpayer owes no taxes

True

CH 4 True or False: Short-term capital gains are taxed at ordinary rates

True

CH 4 True or False: Taxpayers generally deduct itemized deductions when the amount of the itemized deductions exceeds the standard deduction

True

CH 5 True or False: For a taxpayer filing as MFS, Social Security benefits are not taxable if Modified AGI + 50% of Social Security benefits ≤ $32,000

True

CH 5 True or False: For a taxpayer filing as single, Social Security benefits are not taxable if Modified AGI + 50% of Social Security benefits ≤ $25,000

True

CH 5: True or False: For annuities over a life, taxpayers must use IRS tables to determine the expected value based upon the taxpayer's life expectancy

True

CH 5: True or False: For annuities with a fixed term, the expected value is the number of payments times the payment amount

True

CH 2 True or False: The taxpayer isn't required to file taxes if their standard deduction exceeds their income tax

True The taxpayer would have $0 in taxes due since the standard deduction is greater than their income tax

CH 1 Define Term: *Horizontal Equity*

Two taxpayers in *similar situations* pay the same tax

CH 4 Define Term: Qualifying Child: *Age Test*

Under 19 *OR* Under 24 and a full time student or permanently disabled

CH 4 Define Term: *Head Of Household*

Unmarried or considered unmarried at end of year Pays *more than half* the costs of keeping up a home during the year Lived with a "qualifying person" for *more than half* of the year (dependent parents not live with taxpayer)

CH 4 Define Term: *Single*

Unmarried unless qualify for head of household

CH 5 Question: When is income recognized under the *accrual* method?

When a contract's *performance obligation is completed*

CH 5 Define Term: *Property Dispositions*

When a taxpayer disposes (or sells) an asset Taxpayers are allowed to recover their original investment in property (tax basis) before they realize any gain

CH 5 Question: When is income recognized under the *cash* method?

When income is *received*

CH 4 Define Term: *Long Term Capital Gains*

When the holding period for an asset reaches *one year and one day* Generally taxed at 0%, 15%, or 20% depending on the taxpayer's taxable income Promotes spending & investing