Fed. Income Tax Individuals - Exam #1
Taxable income of $100,000. What is the federal income tax payable, average tax rate and marginal tax rate?
- Federal income tax payable: $13,580.00 (9,235.00 + [22%(100,000 - 80,250)]) -Average tax rate: 13.58% -Marginal tax rate: 22%
Taxable income of $700,000. What is the federal income tax payable, average tax rate, and marginal tax rate?
- Federal income tax payable: $196,149.00 (167,307.50 + (37%[700,000 - 622,050])) -Average tax rate: 28.02% -Marginal tax rate: 37%
Taxable income of $375,000. What is the federal income tax payable, average tax rate, and marginal tax rate?
- Federal income tax payable: $82,031.00 (66,543.00 + [32%(375,000 - 326,000)]) - Average tax rate: 21.87% -Marginal tax rate: 32%
Betty, a married taxpayer, makes the following gifts during the current year (2020): $20,000 to her church, $100,000 to her daughter, and $40,000 to her husband. 1) What is the amount of Betty's taxable gifts for the current year (Assuming she does not elect to split the gifts with her spouse)?
- Gift to daughter: $85,000 (100,000 - 15,000 = 85,000) -Gift to husband: $0 (this is a transfer between spouses which is unlimited and not taxed) -Contribution to church: $0 (A gift to charity is not taxable)
Taxable income of $30,000. What is the federal income tax payable, average tax rate, and marginal tax rate?
-Federal income tax payable: $3,205 (1,975.00 + [12%(30,000 - 19,750)]) -Average tax rate: 10.68% -Marginal tax rate: 12%
Bob is a single individual and received a salary of $27,000 before he retired in October of this year. After he retired, he received Social Security benefits of $3,000 during the year. 1) What amount, if any, of the Social Security benefits are taxable for the year? 2) Would the answer be different if Bob also had $1,000 of tax-exempt interest? 3) What if he had $10,000 of tax-exempt interest?
1) AGI (excluding SS benefits): $27,000 + 50% of SS benefits: $1,500 --------------------------------------------------- Provisional Income: $28,500 Taxable portion of the Social Security benefits is $1,500 50% x 3,000 = 1,500 <- less of the two 50% x (28,500 - 25,000) = 1,750 2) AGI (excluding SS benefits): $27,000 + Tax-exempt interest: $1,000 + 50% of SS benefits: $1,500 ---------------------------------------------------- Provisional income: $29,500 Taxable portion of the Social Security benefits is $1,500 50% x 3,000 = 1,500 <- lesser of the two 50% x (29,500 - 25,000) = 2,250 3) AGI (excluding SS benefits): $27,000 + Tax-exempt interest: $10,000 + 50% of SS benefits: $1,500 ---------------------------------------------------- Provisional income: $38,500 Taxable portion of the Social Security benefits is $2,550 85% x 3,000 = 2,550 <- lesser of the two [85% x (38,500 - 34,000)] + 1,500 = 5,325
Dan and Diana filed a joint return. Dan earned $31,000 during the year before losing his jo. Diana received Social Security benefits of $5,000. 1) Determine the taxable portion of the Social Security benefits. 2) What is the taxable portion of the Social Security benefits if Dan earned $46,000?
1) Adjusted gross income (Excluding Social Security benefits): $31,000 + 50% of Social Security benefits: $2,500 ----------------------------------------------------------- Provisional income: $33,500 Taxable portion of the Social Security benefits is $750 50% x 5,000 = 2,500 50% x (33,500 - 32,500) = 750 <- lesser of the two 2)Adjusted gross income (Excluding Social Security benefits): $46,000 + 50% of Social Security benefits: $2,500 ---------------------------------------------------------- Provisional income: $48,500 Taxable portion of the Social Security benefits is $4,250 85% x 5,000 = 4,250 [85% x (48,500 - 44,000)] + 2,500 = 4,250 <- lesser of the two
Cathy, who is single, makes gifts of $50,000 to each of her two adult children. 1)Who is primarily liable for the gift tax on the two gifts, Cathy or the two children? 2)If Cathy has never made a taxable gift in prior years, is a gift tax due on the two gifts?
1) Cathy, the donor, is primarily liable for the gift tax on the two gifts. The children are contingently liable for payment of the gift tax in the event the donor fails to pay 2)Yes, a gift tax must be considered on the two gifts. She is permitted a $15,000 annual exclusion for gifts of a present interest to each donee. Since Cathy has never made a taxable gift, no gift tax will be due because of the unified credit that is available.
John and Carole file a joint return and have three children: Jack, age 23; David, age 20; and Kristen, age 15. All three children live at home the entire year. Below is information about each of the children for 2020: -Jack: graduated from college last year and will start medical school next year. This year, Jack worked sparingly as he studied for the medical school entrance exam, but did earn $5,000. John and Carole provided 80% of Jack's support during the year. -David: a full-time student at State U., earned $6,400 from a part-time job, and provided 40% of his own support - Kristen: a full-time student in high school, has no gross income, and provided non of her own support 1) Based on the above fact, which of the children can be claimed as dependents by John and Carole this year? 2)How would your answer to Part a change if Jack began medical school in August of this year? 3)How would your answer to Part a change if jack earned $3,000 rather than $5,000? 4)How would your answer to Part a change if David was a part-time student rather than a full-time student? 5) How would your answer to Part a change if David provided 60% of his own support rather than 40%?
1) David and Kristen can be claimed as dependents (David and Kristen are their qualifying children). Jack is not qualifying child because he is over 18 and not a full-time student. He is also not a qualifying relative because his gross income is not less than $4,300. 2)Assuming Jack is a full-time student in medical school for at least five months this year, John and Carole can claim all three children. Jack is now considered a qualifying child because he meets the age test. 3) John and Carole can claim all three children. Jack is not a qualifying child because does not meet the age test. Jack is a qualifying relative because his gross income is less than $4,300 for 2020. 4) John and Carole can claim Kristen. David is not a qualifying a child because he does not pass the support test. David is not a qualifying relative because he does not pass the support test. 5) John and Carole can claim Kristen . David is not a qualifying child because he does not pass the support test. David is not a qualifying relative because he does not pass the support test.
Andrew supports his cousin Mary, who does not live with him. Mary has no income and is single. 1) How many dependents does the taxpayer have, assuming the people involved are US citizens? 2)What amount of credit may be claimed for the taxpayer's dependents?
1) Number of dependents: 0 2) Amount of credit claimed: $0
Dave provided 30% of his mother's support and she provided 55% of her own support. Dave's brother provided the remainder. The brother agreed to sign a multiple support agreement. 1) How many dependents does the taxpayer have, assuming the people involved are US citizens? 2)What amount of credit may be claimed for the taxpayer's dependents?
1) Number of dependents: 0 2) Amount of credit claimed: $0
Bob and Ann are filing a joint return. Bob provided over one-half of his father's support. The father received Social Security benefits of $6,000 and a taxable interest income of $800 (the Social Security benefits are wholly tax-exempt in this situation). The father is single and does not live with them. 1) How many dependents does the taxpayer have, assuming the people involved are US citizens? 2)What amount of credit may be claimed for the taxpayer's dependents?
1) Number of dependents: 1 2) Amount of credit claimed: $500
Clay provides 60% of his single daughter's support. She earned $3,000 while attending school during the year as a full-time student. She is 22 years old. 1) How many dependents does the taxpayer have, assuming the people involved are US citizens? 2)What amount of credit may be claimed for the taxpayer's dependents?
1) Number of dependents: 1 2) Amount of credit claimed: $500
Zoe and Walt are married and filing jointly. They provide 60% of the support for their daughter (age 19 and a full-time student) and 100% of the support for their son (age 15), both of whom live with Zoe and Walt for the entire year. Their daughter has $6,700 of wages from a part-time job, and their son has no income. 1) How many dependents does the taxpayer have, assuming the people involved are US citizens? 2)What amount of credit may be claimed for the taxpayer's dependents?
1) Number of dependents: 2 2) Amount of credit claimed: $2,500
John and Georgia are married, file jointly, and have three dependents (qualifying children ages 13,16 and 18). They have salaries of $130,000, a capital loss of $8,000, and tax-exempt interest income of $1,000. They paid home mortgage interest of $10,000, state income taxes of $4,000, property taxes of $2,8000, medical expenses of $3,000, and charitable contributions of $5,000. Federal income taxes of $11,000 were withheld from their paychecks. The tax year is 2020. 1) Compute their taxable income. 2)Compute their additional tax due or refund when they file their tax return (using the 2020 tax rate schedule for all tax calculations)
1) Salaries: $130,000 + Allowable capital loss: $8,000 ---------------------------------------- Adjusted gross income: $127,000 - Standard deduction: ($24,800) ----------------------------------------- Taxable income: $102,200 9,235.00 + (22%[102,200 - 80,250])) = 14,064 2) Gross tax: $14,064 - Child credit: ($4,500) ----------------------------------------- Net tax: $9,564 - Withholdings: ($11,000) ----------------------------------------- Additional tax due (Refund): ($1,436)
Susan's salary is $44,000 and she received dividends of $600. She received a statement from SJ partnership indicating that her share of the partnership's income was $4,000. The partnership distributed $1,000 to her during the year and $600 after year-end. She won $2,000 in the state lottery and spent $50 on lottery tickets. Which amounts are taxable?
1) Salary - Yes, taxable 2) Dividends received - Yes, taxable 3) Share of partnership income - Yes, taxable 4) Partnership distribution in the current year - No, not taxable in the current year 5) Partnership distribution in the following year - No, not taxable in the current year 6) State lottery winnings - Yes, taxable
The following information relates to Tom, a single taxpayer, age 18: Wages $7,000, taxable interest income $425, and itemized deductions $310. 1) Compute Tom's taxable income assuming he is self-supporting. 2) Compute Tom's taxable income assuming he is a dependent of his parents.
1) Wages: $7,000 + Taxable interest income: $425 ----------------------------------------- Adjusted gross income: $7,425 - Standard deduction: ($12,400) ----------------------------------------- Taxable Income: $0 2) Wages: $7,000 + Taxable interest income: $425 ------------------------------------- Adjusted gross income: $7,425 - Standard deduction: ($7,350) ------------------------------------ Taxable Income: $75
Jill and George are married and file a joint return. They expect to have $425,000 of taxable income in the next year and are considering whether to purchase a personal residence that would provide additional tax deduction of $40,000 for mortgage interest and real estate taxes. 1) What is their marginal tax rate for purposes of making this decision? a)What is the marginal tax rate if the personal residence is not purchased? b)What is the marginal tax rate if the personal residence is purchased? 2) What is the tax savings if the residence is acquired? a)Tax without purchase of personal residence? b)Tax with purchase of personal residence? c)Tax savings
1a) 35% (425,000 taxable income) 1b) 32% (385,000 taxable income) 2a) 98,340.00 (94,735.00 + [35%(425,000 - 414,700)]) 2b) 85,231.00 (66,543.00 + [32%(385,000 - 326,000)]) 2c) 98,340.00 - 85,231.00 = 13,109.00
As a result of their divorce, Fred agreed to pay alimony to Tammy of $20,000 per year. The payments are to cease in the event of Fred's or Tammy's death or in the event of Tammy's remarriage. In addition, Tammy is to receive their residence, which cost them $100,000 but is worth $140,000. Assume the change in tax law as of December 31, 2018. 1) How will the $20,000 payments be treated by Fred and Tammy if covered by prior law? a) If the divorce was complete prior to December 31, 2018, Fred... b)If the divorce was complete prior to December 31, 2018, Tammy... 2)How will the payments be treated if the divorce is covered by new law? a)If the divorce was complete after December 31, 2018, Fred...b) If the divorce was complete after December 31, 2018, Tammy... 3)What is Tammy's basis in the residence? 4)What role would a tax advisor play in a divorce?
1a) Fred can deduct the $20,000 payments as alimony 1b) Tammy must include the $20,000 payments in gross income 2a) Fred CANNOT deduct the $20,000 payments as alimoney 2b) Tammy must NOT include the $20,000 payments in gross income 3) $100,000 4) Representatives of individuals involved in a divorce must make sure that the participants understand the after tax implications of alimony payments
Schedule A Form
A U.S. income tax form used by taxpayers to report itemized deductions, which can help reduce an individual's federal tax liability. Where you add al deductions and take the higher of the two **GOAL IS TO HAVE THE LOWEST TAXABLE INCOME**
Tax Refund
A check returning the taxpayer's money to the taxpayer after-tax returns are filed and the overpaid tax is determined. Tax credits, FWT, & Estimated tax payments > Total tax
Statute of Limitations
A federal or state statute setting the maximum time period during which a certain action can be brought or certain rights enforced. This applies to when you file a tax return and you realize you made a mistake after the fact Amended tax return = 1040X **You can filed an amended tax return 3 years after the tax return is filed** Statute of Limitations = 3 year limit to filing an amended tax return The 3 years is based on the later of the due date or date filed Limit the IRS issuing a tax due notice (Deficiency notice because the IRS wants a response quickly) Ex: Tax Year Date Filed Statute expires 2018 2/9/19 4/15/22 2020 4/12/21 4/15/24 2018 7/14/19 7/14/22
401(k) Retirement Plan
A retirement savings plan sponsored by an employer which lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren't paid until the money is withdrawn from the account. when withdrawing in the future, the tax margin will be lower pensions = when the company puts money toward your retirement The withdrawal of money from your retirement plan is included in gross income Form 1099-R is the retirement form
Standard deductions
A set deduction allowed by the IRS regardless of what taxpayers' expenses actually were. The numbers increase each year for inflation
Standard Deduction
A stated amount that you may subtract from adjusted gross income instead of itemizing your deductions (if it is greater than itemized deductions) This is the fixed amount Different for each filing status
W2 Form
A summary of your earnings and withholdings for the year that is provided by your employer Summary of wages employers paid throughout the year Sent to both the employee and IRS (this is to make sure the form matches up exactly with the right information to prevent understating) Social security number is attached in order to ensure the right information is matching up
Estate Tax
A tax on the estate, or total value of the money and property, of a person who has died Applicable to estates in 2020 that are $11,580,000 and greater (Taxable estate if the value if over that number) This tax is usually on high income tax payers Estate value = value of all assets after death Ex: Uncle estate's is 11,580,000 - 5,000 (gift tax) = 11,575,000 **THE GIFT TAX OFFSETS THE ESTATE TAX**
Holly inherited $10,000 of City of Atlanta bonds in February. In March she received interest of $500, and in April she sold the bonds at a $200 gain. Holly redeemed Series EE US Savings bonds that she has purchased several years ago. The accumulated interest totaled $800. Holly received $300 of interest on bonds issued by the City of Quebec, Canada. What amount, if any, of gross income must Holly report?
Capital Gain from sale of City of Atlanta Bonds: $200 + Interest on Series EE Bonds: $800 + Interest on City of Quebec Bonds: $300 -------------------------------------------------------------- Total gross income: $1,300
Tax Due
Credit < Total Tax
Income from discharge of indebtedness
Ex: Taxpayer has $1,211 of debt owed to General Motors. Corp. discharged by GM (the debt has been forgiven) -This taxpayers is thrilled because he no longer has a debt to pay -The $1,211 is included in their gross income (General Motors) (recorded on the Form 1099-C) (1099-C is the cancellation of debt form) -GM will send this form to the taxpayers and IRS to make sure both have the correct information Income from discharge of indebtedness is NOT included in gross income if taxpayers is insolvent -(Insolvent = they have no money to pay the debts; their liabilities exceed their assets) -The income from indebtedness is, therefore, not taxable
Rental expense
Ex: utilities, maintenance, insurance, cost of property itself Depreciation on the cost of property is one of the biggest deductions Filed on Schedule E (Supplemental Income or Loss) -reflects the rental activity -only has room for 3 locations -need to include how many days rented -need to include how many days used for personal purposes (**basically your income statement for the property**) - each column is for a different property - the largest deduction will be mostly from the depreciation expense -if there are other expenses linked to the rental property, you NEED to attach a schedule with the list of the other expenses
Social Security Benefits
Federal aid for the elderly and for disabled workers Is taxable depending on how much income they are receiving Gross pay vs. net pay -federal withholding, state withholding, and social security benefits When you retire, is when you start receiving these benefits (so start saving for your retirement today) Received monthly payments of these benefits Reported to taxpayers on Form 1099-SSA - Line 6: Voluntary Federal Income Tax Withheld (Recipients are NOT REQUIRED to have this withheld) -line 5b: the taxable amount of social security benefits (if any) Social Security benefits are represented on line 5a of 1040 -line 5 from 1099-SSA is recorded here Beneficiary = recipient of benefits **SOCIAL SECURITY BENEFITS ARE BASIC MONTHLY RETIREMENT AND DISABILITY BENEFITS PAID UNDER SOCIAL SECURITY AND ALSO TO TIER-ONE RAILROAD RETIREMENT BENEFITS** **MAXIMUM PERCENTAGE OF SOCIAL SECURITY BENEFITS IS 85% , YOU CANNOT TAX MORE**
What entities generally do not directly pay income taxes on their taxable income but merely pass the income on to what entities?
Flor-through entities, such as sole proprietorships, partnerships, S corporations, LLCs , LLPs and certain trusts, generally do not directly pay income taxes on their taxable income but merely pass the income on to a taxpaying entity.
Individual Income Tax Formula
Gross Income - Adjustments to Income --------------------------------- Adjusted Gross Income (AGI) - Greater of Standard Deduction or Itemized Deduction - Qualified Business Income Deduction ---------------------------------------------- Taxable Income Tax - Tax Credits (non-refundable) + Additional Taxes ------------------------------------- Total Tax - Tax Credits (refundable) - Federal Income Tax Withheld - Estimated Tax Payments ----------------------------------------- Tax Due or Refund
Tax Credits (refundable)
If you qualify for a refundable credit and the amount of the credit is larger than the tax you owe, you will receive a refund for the difference Ex: Tax (5000) Tax Credit (6500) 1,500 Refunded
Beth is divorced from her husband. She maintains a home for herself and supports an elderly aunt who lives in a retirement home. Does this taxpayer qualify as a head of household?
No. The qualifying relative does not live with the taxpayers
Cindy was widowed last year. She maintains a household for herself and her dependent daughter, who lived with her during the year. Does this taxpayer qualify as a head of household?
No. The taxpayer qualifies for the more favorable surviving spouse status.
Dependent's Standard Deduction
On the dependent's tax return, his/her standard deduction is the greater of: $1,100 OR their earned income + $350 The earned income does NOT include passive income (ex: interest income)
Non-Taxpaying entities
Partnerships and corporations ("S") **"S" Corporations are where 100 or fewer shareholders can request to be classified as this** (Exists for tax purposes) Flow-through entities
Suggestion to taxpayers who has tax due
Put more aside for next year (through withholding on paychecks) Fill out W4 form at work to have money withheld More taxes come out each paycheck, but at the end of this year there is a nice bonus
Capital transaction
Record capital gain/loss when selling stock or when recording qualified dividends Categorize each transactions by short-term or long-term Identify first if sell of stock is long or short **With either a long-term capital loss or short-term capital loss, individuals can deduct (net) them only against capital gains plus up to $3,000 of other income** -Net capital loss in excess of $3,000 can be carried over and offset against future capital gains, or subject to the $3,000 limitations, deducted from other income
Maria is a single taxpayer. Her salary is $51,000. Maria realized a short-term capital loss of $5,000. Her itemized deductions total $4,000. The tax year is 2020. 1) Compute Maria's adjusted gross income and her taxable income. 2) Compute her tax liability
Salary: $51,000 - Allowed capital loss: ($3,000) ----------------------------------------------- Adjusted gross income: $48,000 - Standard deduction: ($12,400) ----------------------------------------------- Taxable income: $35,600 2) $4,075 (987.50 + [12%(35,600 - 9,875)]) = 4,075
Gail and her husband have a son when her husband dies unexpectedly on January 1, 2020. Gail asks you, her tax professional, how her husband's death affects her taxes. 1) Determine Gail's income tax each year from 2020 through 2024, assuming her only income is her $150,000 annual salary, her itemized deductions are $24,000 annually, and she has not remarried. Assume also that the tax rate schedules and standard deduction amounts for 2020 also apply in subsequent years. The son was born on April 15, 2007, is Gail's dependent each year, and lives with Gail for all of each year. 2) Determine Gail's income tax each year from 2020 through 2024, assuming her only income is her $150,000 annual salary, her itemized deductions are $24,000 annually, and she has not remarried. Assume also that the tax rate schedules and standard deduction amounts for 2020 also apply in subsequent years. The son was born on April 15, 1996, is not Gail's dependent each year, and lives with Gail for all of each year.
See Homework Answer
Filing Statuts
Single, Married filing jointly, surviving spouse, married filing separately (the worst), head of household (abandoned spouse) If you file with a less favorable filing status, you can file a statute of limitations to be refunded more by correcting the filing status As an accountant, you want to suggest and give advice on which filing status to use Swing = difference between two filing statuses
Taxpaying entities
Sole proprietorships, individuals, corporations ("C", regular corporations)
State Income Tax
Tax paid to the state government, taken directly out of people's paychecks. If preparing a tax return, prepare a federal tax return and then a state return Tax software systems allow state returns to piggy back on federal income tax returns (minor adjustments are made though)
What entities are required to pay income taxes on their taxable income.
Taxpaying entities, such as individuals and C corporations, are required to pay income taxes on their taxable income.
Interest Income
The amount earned from lending money to another person or business recorded on line 2 of 1040 form sources of interest income: bond interest income - corporate (Taxable) - municipal (tax exempt) income earned on federal government bonds is taxable savings bonds Municipal = taxes to pay the state, city, town bonds; you invest in a place, expecting to be paid every 6 months Recorded on Form 1099-INT (Interest) - taxable income is on line 1 - tax exempt income in on line 8 Savings bonds = interest is the increase in value each year - the income is only taxed when cashed in - only taxed on the interest earned each year - included in gross income unless interest income earned when cash is used for higher education and that money is NOT taxed
Federal Income Tax Withheld (FWT)
The amount of federal income tax that you pay through the year on your paychecks Sole Proprietors will not have a tax withheld (The biggest payment will be at the end) Money held on each paycheck; held against tax
Tax credits (nonrefundable)
These are better than deductions Limits to the amount of credits you can claim Tax credits are dollar for dollar (Reduced by/offset) Ex: Tax (5000) Tax Credit (7000) You CANNOT generate a refund because it is non-fundable (the extra will NOT be carried over) - You would lower the tax credit to the same as the tax Example of a non-refundable tax credit: Child care (Deducted but only to the amount of tax)
Unemployement compensation
This is included in Gross Income Record on Form 1040, line 7a (because it will be broken down on Schedule 1) Unemployment compensation on Schedule 1 will be recorded on line 7 **Unemployment benefits are taxable** You can have taxes withheld from unemployment compensation (both federal and state taxes withheld). This way you are not surprised with a big tax bill the following year (you will be less hurt each week forward since it will not all be taxed at once) You have the option to federal and state taxes withheld (you are NOT required, where you are required for wages) Form 1099-G -Line 1 = amount included in gross income -Line 4 and 11 = federal and state taxes withheld (this is highly advised)
Head of Household
Unmarried, supports qualified dependent(s); lower tax rates compared to single Better than filing single because: -Standard reduction is higher -Tax rate is favorable If you do not live with your spouse, file head of household for favorable tax rate
Allen is divorced from his wife. He maintains a household for himself and his dependent mother. Does this taxpayer qualify as a head of household?
Yes
Dick is not divorced, but lived apart from his wife for the entire year. He maintains a household for himself and his dependent daughter. He does not receive any financial support from his wife. Does this taxpayer qualify as a head of household?
Yes
Qualified Business Income Deduction
a deduction to AGI that is only applicable for sole proprietors
Long-term gain/loss
a profit or loss on the sale of an asset that has been held for more than a year **LONG TERM CAPITAL GAINS ALWAYS RESULT IN FAVORABLE TAX TREATMENT/IMPACT**
Short-term gain/loss
a profit or loss on the sale of an asset that has been held for one year or less. Ordinary income tax rates (up to 37% in 2020) for gains on assets held for one year or less A net short-term capital gain is taxed at the same rate as other income
Itemized Deduction
a specific expense, such as a medical expense, that you deduct from your adjusted gross income Ex: Mortgage interest, medical expenses, etc.
Adjustments to Income
allowable deductions from gross income, including certain employee, personal retirement, insurance, and support expenses Ex: Student loan payment interest
Additional Taxes
corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends Ex: Self employment tax on sole proprietor
Qualified Dividends
dividend income qualifies for reduced tax rate (qualified dividend income) Taxed at a lower rate (same rate as long-term capital gains rate) Dividend income will be considered qualified if it is included on 1099-Div, line 1b **Qualified dividends get preferred tax treatment** Qualified dividend income is recorded on line 3a on the 1040 -this comes from the ordinary dividend income (recorded on line 3b) if there are no qualified dividends, do not pull out and write on 3a **Qualified dividends is the percentage of ordinary dividends that applies** (DO NOT ADD TOGETHER THE QUALIFIED AND ORDINARY DIVIDENDS)
Filing Married Separately
if one spouse files using itemized deductions, the other spouse must also itemize
Increase to standard deduction for age and/or blindness
if the individual is 65 years old or older and/or is blind added on top to the regular standard deduction for that filing status increased for each individual and for each disability
Flow-through entities
income from each of the entities flows through to the owners, then the owners pay the tax Ex: TDM Partnership ($90,000) / | \ Taylor ($30,000) Dennis ($30,000) Marko ($30,000) **These owners pay the taxes, the partnership does NOT** If unequal partnership, different income recorded on 1040 for each individual Owners still need to report income, even if cash is not received Additional income is added onto Schedule 1 in "S" corporation
Taxable Income
income on which tax must be paid; total income minus exemptions and deductions **YOU WANT THE LOWEST POSSIBLE (IN A LEGAL MANNER)** Progressive: the higher the taxable income, the higher the rate
TIN
is the taxpayers identification number (aka social security)
IRA contributions
must be made in cash in order to be tax-deductible. the money invested in the account can be used to buy stocks, bonds, mutual funds, or annuities. the money used for IRA contributions cannot be used to purchase life insurance policies or collectibles such as art, antiques, or stamps. the current annual maximum IRA contribution is $5,000. taxpayers who are age 50 or older are entitled to make additional catch-up contributions. currently, the catch- up amount is an additional$1,000 per year **IRA contributions are deductions (included for AGI)**
Alimony
payments made regularly to an ex-spouse after divorce One pays alimony to the other as a result of a divorce settlement Under prior tax law (relating to divorces settled prior to 12/31/18): -alimony received was included in gross income -alimony paid was a deduction from gross income Under new tax law (Relating to divorces settled 1/1/19 and after): -alimony received is NOT included in gross income -alimony paid is NOT a deduction from gross income Social security numbers are recorded on tax return next to the alimony paid to ensure it matches with the other side (the one paying)
Estimated Tax Payments
quarterly tax payments that a taxpayer makes to the government if the tax withholding is insufficient to meet the taxpayer's tax liability. Paid quarterly Allows the sole proprietor to pay taxes as they go ("pay as you go")
Gift tax
tax on donations of money or wealth that is paid by the donor There is no expectation of receiving anything in return Relates to the annual gifts per person exceeding $15,000 ($15,000 is the annual exclusion per person recipient, for the amount that is over, is what is taxed) The tax gift is applicable to each recipient (over the calendar year) **TAX APPLIES TO THE DONOR** Ex: $20,000 gift from the Uncle...$5,000 taxable to the Uncle **GIFTS RECEIVED ARE NOT INCLUDED IN GROSS INCOME** File form 709 to report the taxable gift Charitable gifts are EXCLUDED from gift tax Gifts given between spouses is EXCLUDED from gift tax because the money transfer between spouse is unlimited
Dependency Requirements
taxpayers(who are not dependents of another) may claim exemptions only for persons qualifying as their dependents 1.must be a citizen of the U.S. or a resident of the United States, Canada, or Mexico 2.must not file a joint return with the individual's spouse unless there is no tax liability on the couple's joint return and there would not have been any tax liability on either spouse's tax return if they had filed separately 3.must be considered either a qualifying child of the taxpayer or a qualifying relative of the taxpayer **If you have an individual that meets the dependency requirements, state them on the tax returns to receive tax credits (TAC CREDITS ARE GOOD) Social security number clarifies the dependent
Marginal tax rate
the extra taxes paid on an additional dollar of income What tax rate will be applicable if you add/subtract $1 What will be the increase/decrease to the taxable income
Income from life insurance
the income itself is NOT taxed Life insurance policies can take a long time between the day of death and individual(s) receiving check. Therefore, the interest that is incurred in this time is what is taxed
Gross Income
the total amount of income from wages before any payroll deductions Inclusive (excluded minimal things) "Income derived from business" = self-employment Ex: Interest on income from life insurance
Gross Income
the total amount of income from wages before any payroll deductions all items of income you receive Include: Wages
