Tax 1: Test 1

No taxes are paid on these, but she must report $85,000

Betty, a married taxpayer, makes the following gifts during the current year (2018): $20,000 to her church, $100,000 to her daughter, and $40,000 to her husband. What is the amount of Betty's taxable gifts for the current year (assuming that she does not elect to split the gifts with her spouse)?

Yes, he used the cars for show, not personal use, so he gets to report $50,000 as an above line deduction from gross income

Bob collects sports cars and stores them in a vault. He paid $500,000 for these cars, but resold them this year for $450,000. He drove the car once every few months to car shows, but didn't drive the cars on a regular basis. Does he get to include a capital loss as an above line deduction? If so, how much?

gift inheritance welfare municipal bond interest combat zone housing for minister scholarship (tuition/books) physical injury workers compensation

Exclusions from taxation

state income tax

Flat tax on income

anything over $50,000

If employer gives you term life insurance, how much is taxed?

a. state income taxes (flat) b. federal tax (progressive) d. property taxes (proportional)

Indicate which of the following taxes are generally progressive, proportional, or regressive: a. state income taxes b. federal tax d. property taxes

- you get to file as MFJ for the year your spouse dies + 2 additional years as long as you remain unmarried those years. - if you are >65 when this happens, you can get an additional $1,300 standard deduction

Qualifying widower/ surviving spouse benefits

Ricardo doesn't get taxed. He lists it as a business expense and lower his income that year. Therefore, he pays less tax. He's in the 37% bracket, so his tax savings are ($3,000 x 37%). Jane doesn't have to pay taxes either bc her standard deduction wipes out the whole amount (SDD = $3,000 + $350). This is called income shifting and it is completely legal.

Ricardo owns a small unincorporated business. His 15-year old daughter Jane works in the business on a part-time basis and was paid wages of $3,000 during the current year. Who is taxed on the earnings? Jane or her father? Is this smart? Is this illegal?

6 years

The government has a statute of limitation of how many years if you have omitted at least 25% of your income

You are an abandoned spouse - you are married but haven't seen your spouse in the last 6 months of the year, and you have a dependent living at home.

Under what circumstances can a married person file as head of household?

proportioned

the property tax is _____, which means if your home is twice as high, your tax is twice as high milledge rate

Exclusion Ratio

total investment in the contract/(remaining life x annual payments)

1. common law - each individual keeps the portion of his or her income 2. common property - each individual gets 50% of total assets

two laws for separating assets between spouses when they choose to either divorce or file separately:

your marital status at december 31

what constitutes if you file as married

age 65 10 years

you get medicare at age _____ and have to have worked at least _____ years to qualify for it

county

you pay property taxes to the

Joint and Several Liability

A legal concept that makes each partner in a partnership legally liable for all the debts of the partnership/ marriage filed jointly.

online goods are now taxed. even if there is no physical location of company, there is a tax

A year ago Nexus required that _____ be taxed

an above line deduction

Alimony paid before 2019 was listed on tax return as

No, he is not dependent because he is >24 years old & makes above $4,150

Brian is age 24 and Wes and Tina's son. He is a full-time student and lives in an apartment near campus. Wes and Tina provide over 50% of his support. Brian works as a waiter and earned $42,000. Can Wes and Tina claim Brian as dependent?

No, he is >24 and makes above $4,150

Brian is age 24 and Wes and Tina's son. He is a part-time student and lives in an apartment near campus. Wes and Tina provide over 50% of his support. Brian works as a waiter and earned $42,000. Can Wes and Tina claim Brian as dependent?

Nope. After 12/31/2018, paid alimony stopped being an above line deduction and received alimony became no longer taxable

Can people who pay alimony list it as an above line deduction after 12/31/2018?

No, taxable income cannot be below zero

Can taxable income be below zero?

If more than one sibling is supporting mom, all of the siblings sign off on supporting her, and ONE sibling gets to have that $500 tax credit each year. The catch is, each sibling must be providing at least 10% of mom's support, the dependent must be kin, and the dependent cannot be making over $4,150 per year

Explain the purpose of the multiple support agreement.

No, they cannot claim her. Her income is $4,500, which is >$4,150

Granny, age 82, is Tina's grandmother and lives with Wes and Tina. During the current year, Granny's only source of income were her social security of $4,800 and interest on U.S. bonds of $4,500. Granny uses her income to pay 40% of her total support. Wes and Tina provide the remainder of Granny's support. Can Wes and Tina claim Granny?

you must provide more than half of the household expenses, be considered unmarried for the tax year, and have a qualifying child or dependent

HOH requirements

You are required to file both a U.S. and a UK tax return, but the first $95,000 you earn you get to exclude from your U.S. gross income

How do you file taxes if you work for a U.S. company but work overseas in the UK?

You file as HOH

How do you file your taxes if you are an abandoned spouse?

- a single person: $12,000 - mfj: $24,000 - single, dependent: $1,050 or (earned income FROM YOUR JOB ONLY + $350)

How much is the standard deduction for: -a single person -married filing jointly -single and dependent on someone

$15,000 and you MUST report if over $15,000 in a year only the amount over 15,000 is taxed 40%

How much money can you give as a gift to someone each year before it starts to eat into your 11 million dollar lifetime limit?

bc he is getting back what he loaned. He only pays taxes on the interest he earns. For example: if you loan someone $100,000 and get back $110,000, you report $10,000 as gross income

If a loan is repaid, the lender does not have to include the principal portion of the payment in gross income. Why?

No. The statute of limitation is 3 years after the tax return is filed

If a taxpayer files his or her tax return and receives a tax refund from the IRS, does this mean that the IRS feels that the return is correct and will not be subject to a future audit?

all of it

If employer gives you whole life insurance, how much is taxed?

Nope. The estate tax went away for one year, 2006. The estate tax is a tax on anything you leave behind that is valued to be over $11.4 million. This applies to every year EXCEPT 2006.

If someone dies in 2006 and leaves behind an estate worth $200 million to their son, is it taxed?

no, you were physically injured

If someone pushes you down and you sue, is it taxed?

yes, they can claim you

If you are 26, make less than $4,150, and your parents provide over 50% of your income, can they claim you as dependent?

No, social security is not included

If you are trying to claim your mom as dependent, you provide over 50% of her support, and she gets social security, is that social security included in the $4,150 a year limit?

You now have to pay taxes on the full amount :(

If you buy an annuity, and you beat the chart (live passed your expected remaining life), how much of your annual payments do you pay taxes on?

no, the $15,000 limit is per individual. You can give up to 15,000 to as many people as you want in a year and not report it

If you give $15,000 to more than one person in a year, does it eat into your lifetime limit of 11,000,000?

nope, child support doesn't go in your gross income

If you receive child support, does it go in your gross income?

Yes, there was no physical injury

If you sue someone for slander, is that taxed?

HOH

If your husband dies while you have a dependent child, and you file as MFJ the year of death and two years after.... and you do not get married during or after the time you are a surviving spouse, what do you file as the fourth year?

No, but you might want to file anyways in case your employer is withholding federal taxes so you can get a refund

If your taxable income is zero, are you required to file?

Yes, because scholarships aren't included as income in regards to supporting yourself

Imagine this. You are attending Emory. Your tuition is $50,000. You win a $40,000 scholarship. Your parents pay the remaining $10,000. Can they still claim you as dependent?

- cancelation of debt is taxable - debt is not taxable if you declare bankruptcy

In which situations would you pay taxes on the discharge of indebtedness? In which situations would you not?

If you were divorced before 12/31/18, your alimony is taxed. If you were divorced after 12/31/18, alimony is not taxed.

Is alimony taxed?

No, you are not required to

Is an individual required to file a tax return if he or she owes no tax at all?

Yes, the interest received from U.S. obligations is taxable. For example, if you earn interest on a U.S. bond, it is taxable

Is the interest received from U.S. obligations taxable?

yes, minimize as much as legally possible

Is the principal goal of tax planning to absolutely minimize the amount that a taxpayer must pay?

yes, unemployment compensation is taxamble

Is unemployment compensation taxable?

yes, unemployment compensation is taxed because it serves as a substitute for wages... and wages are taxed

Is unemployment compensation taxed?

a. 35% marginal rate b. $14,000 in tax savings

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 deductions of $40,000 for mortgage interest and real estate taxes. a. what is their marginal tax rate for purposes of making this decision? b. what is the tax savings if the residence is acquired?

Lady: She gets to write off the $5,000 as a business expense, so she gets a tax benefit of $5,000 x 37% = $1,850. The son: The kid is dependent, so he gets a standard deduction of ($5,000 earned income from job + $350 = $5,350). His taxable income is then zero. He doesn't have to file taxes!

Lady is a medical doctor with her own practice. She makes $500,000 a year and is in the 37% tax bracket. She has a 13 year old son. She hires her son to come clean her law office on the weekends. By the end of the year, she has paid her son $5,000 for the work he has done. How does she report this? How does the son report?

<17 = $2,000 credit >17 = $500 someone you're taking care of = $500 RULES: 1. Provide over 50% of total financial support 2. The person you're claiming must make less than $4,150 gross income (not taxable income) -EXCEPTION: if you're under 24 years old and a full time student, you can make as much money as you want and still be claimed as long as the parents are providing over 50% of your support. 3. Must live with you or be kin to you -being kin means closer than a cousin (siblings, in-laws

List the conditions that must be met in order to claim qualifying children and qualifying relatives as dependents. Briefly explain each one.

because most estates aren't over $11 million

Most estates are not subject to the federal estate tax. why?

Because if you are a homeowner, one of the itemized deductions you can get is is for your mortgage interest. You can subtract anything you pay the bank for interest on your loan. If you buy a $400,000 house... you're going to pay a LOT of interest... it will be more than that $12,000 or $24,000 standard deduction

Most homeowners itemize deductions while many renters claim the standard deduction. Explain.

No, they cannot claim you

Once you're over 24 and make over $4,150, can your parents claim you anymore?

- you have a dependent child living with you - you do not remarry during the period of having the surviving spouse status

Qualifying widower/ surviving spouse requirements

Yes, even though she makes >$4,150, she is <24 AND a full-time student

Sherry is age 22 and Wes and Tina's daughter. She is a full-time student and lives in the college dormitory. Wes and Tina provide over 50% of her support. Sherry works part-time as a bookkeeper and earned $5,000. Can Wes and Tina claim Sherry as dependent?

No, because she makes over $4,150 and is a part-time student

Sherry is age 22 and Wes and Tina's daughter. She is a part-time student and lives in the college dormitory. Wes and Tina provide over 50% of her support. Sherry works part-time as a bookkeeper and earned $5,000. Can Wes and Tina claim Sherry as dependent?

charities and your spouse

So we know that if you gift someone over 15,000, you must report it and it eats into your 11,000,000 lifetime limit. Who or what are the exceptions to this rule?

minimum: age 62 maximum: age 67

Social Security: minimum benefits are at age _____ maximum benefits are at age _____

If your client cannot file on April 15, he or she can get a 6 month extension to file. This extension is only an extension to file, not pay... so you have to ask your client, "did you get a refund last year?" If they say yes... their employer probably withheld more than required just like they did last year. It's all good. I'll have it filed within 6 months. If your client says "no, I didn't get a refund last year. I had to pay," you say "okeyyy... I can file your papers, but we'll have to send in an estimate of what you'll owe this year. Idk what you owe this year, but you owed $12,000 last year. So you need to write a check for $12,000 just to be safe. I am gonna send the check in with the extension to the IRS. If you don't send in that payment though and owe $12,000 in October, the IRS will hit you with underpayment penalties and interest!!!

Sometimes taxpayers may not be able to file their tax returns by the normal due date. Are extensions available? How long are the extensions? Do extensions enable taxpayers to delay paying the tax they owe?

-Whoever claims physical custody of the kids gets to claim the kids on their taxes... even if the other parent provides most of the children's support. -In cases of joint custody, the parent the children spend the most nights with gets to claim the child as dependent.

Summarize the rules that explain which parent claims their children as dependents in cases of divorce.

It's to push you into how they want you to live... doing things that are good for society as a whole. For example, if you buy a house, it is subsidized. People that own houses tend to be good citizens. Student loan interest is tax deductible. For every kid you have, you get $2,000 of tax credit if they are under 17. After 17, it's $500. IRA plan.

The primary objective of the federal income tax law is to raise revenue. What are its secondary objectives?

$12,000 if you're single and $24,000 for married filing jointly

The standard deduction is

- Anything to be sold in the regular course of business (inventory) - Anything you use for your business (TV in waiting room)

What are NOT capital assets?

Their marriage status at December 31 is married

What conditions must be met by a married couple before they can file a joint return?

You STILL FILE. You include a little note on the tax return saying you can't currently pay the $7,000, so you'd like to set up an installment plan. The client will pay off what they owe in monthly installments + interest over the course of a year or two

What do you do if it's April 15, and you do your client's taxes... and they owe $7,000... but they can't pay the $7,000?

- Gifts to IRS-approved charities - Gifts to your spouse - Gifts covering another person's medical expenses - Gifts covering another person's tuition expenses

What gifts are excluded in regard to the $11 million lifetime limit? These will not go towards the limit, even if you gift over $15,000 a year

No, you must be a full-time student or make under $4,150

What if you're 21, not a full time student, make over $4,150... can your parents claim you?

pretty much everything you own

What is a capital asset?

You are married, taking care of a child who lives with you, and you haven't seen your spouse in the last 6 months of the year

What is an abandoned spouse?

You have registered for 12 hours and have attended school for at least 5 months that year (one semester)

What is considered a "full time student"

April 15 is the normal due date If falls on Saturday, Sunday, or holiday, you file on the next business day

What is the normal due date for the tax return of calendar-year taxpayers? What happens to the due date if it falls on a Saturday, Sunday, or holiday?

3 years

What is the statute of limitations for transactions involving disallowance of tax deduction items?

forever

What is the statute of limitations for transactions involving fraud or not filing a return?

6 years

What is the statute of limitations for transactions involving the omission of rental income that is greator than 25% of the taxpayer's reported gross income?

capital assets that are NOT used for personal use

What kinds of capital assets allow you to report the its losses as an above line deduction?

If the person is <24 AND a full-time student.... but once they turn 24, salary is considered

When is the ONLY time you can claim someone if they make over $4,150?

a $10 credit

Which is worth more? a $10 credit or a $10 deduction?

Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—levy no personal income tax. Two (New Hampshire and Tennessee) don't tax wages, but do currently tax investment income and interest.

Which states have no state income tax

both are liable for the maximum amount. They'll typically go after whoever has the most money... but if they can't get access to one person, they'll go after the other person. If they can't get it from that person, they'll go after his or her wages, make him or her sell the house, etc.

Who is liable for additional taxes on a joint return?

You would rather have an above line deduction because it is taken out automatically... If it is a below line deduction, and it is lower than the itemized or standard deduction, it is worthless because you will end up taking the other deduction that is bigger.

Would you rather be given an above line deduction or a below line deduction? Why?

you would rather have a credit because it isn't hit by the marginal rate. An above line deduction is an amount times your marginal rate.

Would you rather have an above line deduction or a credit?

total amount of tax/taxable income

average tax rate =

your parents provide over 50% of your non-scholarship income. It also includes physical assets they provide you such as an automobile, housing, etc.

briefly explain the concept of support

IRA student loan interest alimony paid before 2018 losses on capital assets (up to $3,000)

examples of above line deductions

A credit directly decreases the amount of tax you owe while a deduction lowers your overall amount of taxable income. A deduction can only lower your taxable income. You can't get money back from a deduction.

explain the difference between a deduction and a credit

over $11 million ($22 million if married) tax is 40%

gift/inheritance tax is on anything over _____ and the tax rate is _____

any increase in wealth that is finalized, and you cannot think of any exclusions

gross income is

statue of limitations

how long the government has to come after you (and for you to go after them)

goods and not houses or stocks

sales tax only apply to _____ and not _____

employees and employers

social security tax (FICA) is paid for by

above line deduction x marginal rate

tax savings =

gift tax and estate tax

the _____ tax and _____ tax are linked together

federal income tax

the biggest tax most people pay. goes between 10% and 37% (marginal rates). Progressive.

40%

the gift tax is _____% on anything over $11,000,000

income shifting

the transfer of money within a business or between family members to decrease tax liability or adjusted gross income.

rich people and people who own their own companies

what types of taxpayers are more likely to be audited by the IRS?

constructive receipt

when you receive a check, you report it when you receive it, not when you cash it in (unless the check later bounces). Even if your agent receives the check for you, it is the same as someone handing you the check

yes

will the average rate always be lower than the marginal rate?