Aem 4940.2 Chapter 3 Tax Determination; Personal Dependency Exemptions; An Overview Of Property Transactions

Front 1

The basic tax rate structure is progressive, with rates ranging from ___ to ___ ?

Back 1

10% to 35%

Front 2

In the Tax Formula, "Income (broadly conceived)" includes?

Back 2

Taxable and Non-Taxable Income

Front 3

What are Gross Receipts?

Back 3

The total sales for your business during the year before deductions for returned items, allowances and discounts.

Front 4

Are Income and Gross Receipts the same?

Back 4

No

Front 5

Gross Income is equal?

Back 5

Is Income minus exclusions.

Front 6

Gross Income includes only

Back 6

Realized Gains

Front 7

What are the two categories of deductions that apply to the individual taxpayer?

Back 7

1. Deduction for Adjusted Gross Income
2. Deduction from Adjusted Gross Income

Front 8

What is another phrase for "Deduction for Adjusted Gross Income"

Back 8

Above the Line Deductions

Front 9

Income and Gross Income are likely to be equal. However, list two things the Income will have that Gross Income will not have?

Back 9

1. Return of Capital
2. Receipt of Borrowed Funds

Front 10

In the IRC, "except as otherwise provided" refers to?

Back 10

Exclusions

Front 11

What is an example of "return of capital?"

Back 11

When you sell stock at a gain. If you buy stock at 8 and sell it for 12. The 4 is only taxable as a gain, the 8 is a return of capital.

Front 12

What is an example of "return of borrowed funds."

Back 12

The return of a security deposit is a receipt of borrowed funds and is not taxable.

Front 13

What is Global System?

Back 13

Global system is a tax approach where the government taxes its citizens and residents on their worldwide income regardless of where earned.

Front 14

Why are above the line deductions called such?

Back 14

Because on the tax return they are taken before the "line" designating AGI

Front 15

Why are above the line deductions sometimes referred to as page 1 deductions?

Back 15

Because they are referred to as page 1 deductions since they are claimed, either directly or indirectly (ie through supporting schedules)

Front 16

What is AGI the basis for?

Back 16

AGI is an important subtotal that is the basis for computing percentage limitations on certain itemized deductions, such as medical expenses, charitable contributions, and certain casualty losses.

(For example, Medical expenses are deductible only to the extent they exceed 7.5 of AGI)

Front 17

Deduction for AGI?

IRA Contributions?

Back 17

Yes

Front 18

Can Capital Losses be deducted for AGI?

Back 18

Yes

Front 19

Deductions FOR AGI, are do they reduce or increase your AGI?

Back 19

Decrease

Front 20

What are Itemized Deductions?

Back 20

Itemized deductions, which generally are personal expenses that can be deducted to reduce your income after your adjusted gross income (AGI) and before your income tax calculation.
Itemized deductions include medical expenses, taxes, deductible interest, charitable contributions, casualty and theft losses, unreimbursed employee expenses and miscellaneous deductions

Front 21

Taxpayers are allowed itemized deductions for expenses related to:
(3 Answers)

Back 21

1. The production or collection of income
2. The management of property held for the production of income
3. The determination, collection, or refund of any tax.

Nonbusiness expenses are expenses incurred in connection with an income-producing activity that does not qualify as a trade or business. Such expenses are itemized deductions

I suppose #3 means if you have to pay to get your taxes prepared?

Front 22

Itemized deduction are sometimes referred to as "nonbusiness expenses."

How do they differ from trade or business expenses? (Referencing the Tax Formula)

Back 22

Trade or business expenses, are deductions FOR AGI.

Thus, Itemized Deductions are deductions from AGI and Trade and Business expenses, are deductions FOR AGI.

Front 23

Who sets the standard deduction and what is its role?

Back 23

The standard deduction, is set by Congress, is used to exempt part of a taxpayer's income from federal income tax liability.

Front 24

The standard deduction is the sum of two components:

Back 24

1. Basic Standard Deduction
2. Additional Standard deduction

Front 25

The standard deduction amounts are adjusted for ___?____ annually?

Back 25

Inflation

Front 26

What is the Standard deduction for year 2008?

Back 26

$5,450

Front 27

What is the Standard Deduction for year 2007?

Back 27

$5,350

Front 28

How should you decide between itemized deductions or standard deductions?

Back 28

You choose the greater amount, because it is being deducted to reduce your federal income tax liability.

Front 29

A taxpayer is 66 and blind, what is her standard deduction?

Back 29

The key thing to remember is that she is eligible for two additional standard deductions. Thus, her standard deduction and 1050+1050 or 1350+1350.

Front 30

Who are Personal and Dependency Exemptions allowed for?

Back 30

Exemptions are allowed for the taxpayer, for the taxpayer's spouse, and for each dependent of the taxpayer.

Front 31

How much is the personal and dependency exemption for 2008?, 2007?

Back 31

3,500 - 2008
3,400 - 2007

Front 32

A married individual decides to file separately, is his or her spouse required to itemize deductions if the other spouse does?

Back 32

Yes!

A married individual filing a separate return where either spouse itemizes deductions is not eligible for the standard deduction

Front 33

Are nonresident aliens eligible for the standard deductions? Are they able to itemize?

Back 33

Nonresident aliens are not eligible for the standard deduction and must always itemize deductions

Front 34

The individual is filing for a period of less than 12 months, because of a change in the annual accounting period. Can this person file using a standard deduction?

Back 34

No, this person must itemize deduction, because standard deductions assume a year's period.

Front 35

You're a dependent, what is your standard deduction?

Back 35

Your standard deduction as a dependent in 2008 is:

1. $900
OR
2. Earned Income + $300

HINT for Additional Information

Hint 35

Notice, that this coincides with the rule that makes it necessary for you to file.

Because if you have earned and unearned income, this is similar to that test.

Front 36

Dependents must file under 3 specific rules. If the child has both earned and unearned income. What is the rule?

Back 36

They are required to file if gross income is

1. >$900
OR
2. Earned Income + $300 + (Plus any Additional Standard Deductions)

Hit the HINT Box for Explanation!

Hint 36

This is essentially saying that if you are not elderly and you have unearned income in excess of $300, you must file. (or I suppose, $900 - Earned Income = Max Unearned) In this scenario you can have at most 899.99 in unearned.

On the other hand, if you are over 65 years old, you're able to add at least $1050 to this amount. Thus you can have up to $1050 + $300 = $1350, in Unearned Revenue and another $900 in earned revenue and not file.

Even more, if you are blind!

Front 37

Is interest earned or unearned income?
Scenario: Interest in a savings account

Back 37

Unearned

Front 38

Can you claim a spouse claim another spouse as a dependent if they are filing separately?

Why or Why Not? How?

Back 38

Yes, only in the situation where the other spouse has no GROSS INCOME

Front 39

When is the determination of Marital Status usually made?

What is the exception to this?

Back 39

At the end of the year

The exception is when the spouse dies during the year.

Front 40

You lived for only 3 days in 2008, are you allowed an exemption?

Back 40

Yes

Front 41

Who is a dependency exemption allowed for?

Back 41

1. Qualifying Child
2. Qualifying Relative

Front 42

Define Qualifying Child:

Back 42

An individual who, as to the taxpayer, satisfies the relationship, abode, and age tests. To be claimed as a dependent, such individual must also meet the citizenship and joint return tests and not be self-supporting. §§ 152(a)(1) and (c).

Front 43

Does a Brother or Sister pass the Relationship Test for Qualifying Child?

Back 43

Yes

In addition, their descendants as well, nieces, nephews, etc.

Front 44

Are ancestors of qualifying children pass the relationship test? (Qualifying Child)

Back 44

No

So this includes In Laws and aunts and uncles.

Front 45

What is the Abode Test?

Back 45

This states that a qualifying child must live with the taxpayer for more than half of the year.

Front 46

You attend school full time for only one semester, are you eligible to be a dependent (assume you are 23 yrs old)?

Back 46

Yes

You are only required to be in school for one semester throughout the year (more specifically: 5 months) to be eligible.

Front 47

What is the Support Test for Qualifying Child?

Back 47

The Child cannot support more than half of his living expenses.

Front 48

Could your mother ever be a qualifying child?

Back 48

No, remember, no ancestors

Front 49

Define who could be a Qualifying Relative

Back 49

1. Lineal Ascendants (Parents, Grandparents)
2. Collateral Ascendants (e.g. Uncles, Aunts)
3. Certain-in-Law (e.g. Sons, daughters, fathers, etc.)

Front 50

The Relationship Test for Qualifying Relative includes?

Back 50

Lineal Ascendants (Parents, Grandparents)
Collateral Ascendants (e.g. Uncles, Aunts)
Certain In Law Relatives

Front 51

Can you claim an ex-spouse as a dependent?

Back 51

Yes, however it cannot be int he year that you divorced. If it is the year proceeding, and he/she still lives with you, then it is permissible.

Front 52

Are cousins qualifying relatives?

Back 52

No

Front 53

Do you have to be related to qualify as a qualifying relative?

Back 53

No

Front 54

The dependent's gross income under qualifying relatives must be less than what?

Back 54

It must be less than the exemption amount, which is 3,500. Or Else, they are disqualified.

Front 55

You give your ailing grandmother a television, it costs $600, is this part of support given?

Back 55

Yes

You can add 600 dollars to the amount you claim to support her

Front 56

Your parents take out a loan for 7000 and you give them 3000 to support them, because they are dying, Do they qualify as qualifying relatives?

Back 56

No, because the 7000 is defined as support, even though they must pay it back. This represent more than half their support.

Front 57

What is the Multiple Support Agreement?

Back 57

To qualify for a dependency exemption, the support test must be satisfied. This requires that over 50 percent of the support of the potential dependent be provided by the taxpayer. Where no one person provides more than 50 percent of the support, a multiple support agreement enables a taxpayer to still qualify for the dependency exemption. Any person who contributed more than 10 percent of the support is entitled to claim the exemption if each person in the group who contributed more than 10 percent files a written consent (Form 2120). Each person who is a party to the multiple support agreement must meet all the other requirements for claiming the dependency exemption. § 152(c).

You must meet the relationship test and actually be in EXCESS of 10 percent

Front 58

In addition to the test inherent in the Qualifying Relative and Qualifying Child tests, what are two additional additional tests that all dependents must meet?

Back 58

1. Joint Return Test
2. Citizenship or Residency Test

Front 59

What's a difference between the two supporting tests?

Back 59

For a qualifying child category, the child cannot be self-supporting.

Front 60

Say all that you can about the Joint Return Test

Back 60

If a dependent is married, in order to meet the joint return test, the individual may not file a joint income tax return with his or her spouse unless he or she is filing a joint income taxt return in order to receive a refund of tax withheld, no tax liability would exist for either spouse on separate income tax returns, and neither spouse is required to file an income tax return.

Front 61

Explain the Citizenship or Residency test

Back 61

To be a dependent, the individual must be either a U.S. Citizen, a U.S. resident, or a resident of Canada or Mexico for some part of the calendar year in which the taxpayer's tax year begins.

Front 62

True or False

The qualifying child category has no gross income limitations

Back 62

True

Front 63

What kinds of reductions in taxable income are phased out as AGI exceeds specified threshold amounts?

Back 63

Personal and Dependency Exemptions are phased out.

The process is extensive, refer to page 3-19 to see an example. It's important to know when dealing with high AGI clients

Front 64

What is the Child Tax Credit?

Back 64

A tax credit based solely on the number of qualifying children under age 17. The maximum credit available is $1,000 per child through 2010. A qualifying child must be claimed as a dependent on a parent's tax return in order to qualify for the credit. Taxpayers who qualify for the child tax credit may also qualify for a supplemental credit. The supplemental credit is treated as a component of the earned income credit and is therefore refundable. The credit is phased out for higher-income taxpayers. § 24.