Aem 4940.2 Chapter 3 Tax Determination; Personal Dependency Exemptions; An Overview Of Property Transactions P2

Front 1

In what two ways is the tax liability computed?

Back 1

1. Tax Table Method
2. Tax Rate Schedule Method

Front 2

What do most taxpayers compute their tax using?

Back 2

Tax Table Method

Front 3

Are you required to use the tax table method if you are eligible for it?

Back 3

Yes

Front 4

Information Card

Back 4

The following taxpayers are not eligible to use the Tax Table Method

1. An individual who files a short period return
2. Individuals whose taxable income exceeds the maximum amount in the Tax Table
3. An estate or trust

Front 5

Define: Statutory (Nominal) Rates

Back 5

The rates in the tax rate schedules

Front 6

Define: Marginal Rate

Back 6

The marginal rate is the highest rate that is applied in the tax computation for a particular taxpayer.

Front 7

Define: Average Rate

Back 7

The rate that equals the tax liability divided by taxable income

Front 8

Explain the difference between Tax Credits and Tax Deductions

Back 8

Tax credits reduce the tax liability dollar for dollar. Tax deductibles reduce taxable income on which the tax liability is based. (a Percentage)

Front 9

Unearned Income is also known as

Back 9

Investment Income

Front 10

Define: Kiddie Tax

Back 10

Passive income, such as interest and dividends, that is recognized by a child under age 18 is taxed to him or her at the rates that would have applied had the income been incurred by the child's parents, generally to the extent that the income exceeds $1,700. The additional tax is assessed regardless of the source of the income or the income's underlying property. If the child's parents are divorced, the custodial parent's rates are used. The parents' rates reflect any applicable alternative minimum tax and the phaseouts of lower tax brackets and other deductions. § 1(g).

Front 11

What is the cap for unearned income when applying the Kiddie Tax?

Back 11

$1,800

Front 12

How do you determine net unearned income that is will taxed?

Back 12

Unearned Income
Minus $900

Minus the Greater of
1. $900 of the Standard Deduction (Notice that this equals $1,800, the cutoff amount for the Kiddie Tax)
OR OR OR OR OR
2. The amount of allowable itermized ddeductions directly connected with the production of the unearned income.

EQUALS: Net Unearned Income

Front 13

If the net unearned income is positive, the net unearned income is taxed at the parents rate, even if the parents did not transfer income to the child. TRUE OR FALSE?

Back 13

TRUE

Front 14

If a child is subject to the kiddie tax, there are two options for computing the tax on the income, what are they?

Back 14

1. The child may file a separate return.
2. The parents may elect to report the child's income on their own return

Front 15

Define: Allocable Parental Tax

Back 15

This is the tax on net unearned income

Front 16

How does one compute the tax on net unearned income?

From here, determine how you are able to find exactly, the allocable parental tax.

Back 16

You compute is on FORM 8615 as though the income had been included on the parents' return.

Front 17

Hans the child has been hit with the kiddie tax, without knowing exact figures, what must you subtract from his net unearned income to find his taxable income?

Back 17

You must subtract his standard deduction ($900)

You must also subtract his net unearned income, because this is already being accounted for in a separate form.

Front 18

What is the general rule that says when a tax return is required?

Back 18

A tax return is required for every individual who has gross income that equals or exceeds the sum of the exemption amount plus the applicable standard deduction.

Front 19

If you are a self-employed individual what is the amount you must file a tax return?

Back 19

If you have net earnings of $400 or more

Front 20

Form 1040 is also know as the?

Back 20

The Long Form

Front 21

Marital Status is determined when?

Back 21

At the last day of the year

Front 22

Describe the provisions with the surviving spouse status?

Back 22

The joint return rates also apply for two years following the death of one spouse, if the surviving spouse maintains a household for a dependent child.

Front 23

If you maintain a house for your dependent parents, what status may you claim on your tax returns?

Back 23

You can claim Head of Household

Front 24

What is the formula for computing the Realized Gain or Loss?

Back 24

(Amount Realized from the Sale) - (Adjusted Basis of The Property)

Front 25

How do you determine the Amount Realized from Sale?

Back 25

The amount realized is the selling price of the property less any costs of disposition

Front 26

How do you determine the adjusted basis of the property?

Back 26

Cost (or other original basis) at date of acquisition
ADD Capital Additions
MINUS Depreciation (if appropriate) and other capital recoveries

EQUALS: the Adjusted Basis at date of sale or other disposition

Front 27

Define: Capital Asset

Back 27

An item that you own for investment or personal purposes, such as stocks, bonds or stamp collections. The sale of a capital asset produces a capital gain or a capital loss. Assets you use in your business and inventory are not capital assets.

Front 28

What is the alternative tax computation?

Back 28

This is the special tax rate applicable to long-term capital gains.

Front 29

When is the alternative tax computation used?

Back 29

It is only used if the taxpayer's regular tax rate exceeds the applicable alternative tax rate.

Front 30

You tax on short term gains can not exceed

Back 30

Your normal tax rate

Front 31

Describe the Determination of Net Capital Gain

Back 31

The capital losses are aggregated by holding period (short term and long term) and applied against the gains in that category. If excess losses result, they are shifted to the category carrying the highest tax rate.

Front 32

When does a net capital gain occur?

Back 32

This occurs if the net long-term capital gain exceeds the net short term capital loss.

Front 33

Net capital loss can be used to offset ordinary income of up to

Back 33

$3,000

If a taxpayer has both short and long term capital losses, the short term category is used first to arrive at $3,000

Front 34

Can you carry forward losses?

Back 34

Yes

Remember that you first begin with short term losses, so your carried over losses into the next year are likely to be long term losses

Front 35

How can you effectively reduce your taxes by shifting between a standard deduction and itemized deduction?

Back 35

Well, if you know that you have substantial itemized deductions, you can time your payments where you spend money to increase your itemized deductions in one year and then in the following year, your standard deduction would be greater.

Front 36

How can you measure effective tax planning?

Back 36

By the effective rate paid year to year