Individual Tax Chapter 3 Notes

Front 1

What does standard deduction depend on?

Back 1

1. Age
2. Blindness

Front 2

If someone is claiming you

Back 2

You cannot claim yourself.

Front 3

Filing Status - Single

Back 3

Unmarried or separate. Married status is determined at end of year.

Front 4

Married filing jointly

Back 4

If you get married at any point during the year you get to be married for whole year. If spouse dies you still get to file as married the whole year. Qualifying spouse still married filing jointly. If spouse dies in 2011 and has a dependent aka daughter, son, stepdaughter or stepson, you can take married filing jointly this year and for following 2 years.

Front 5

Married filing separately

Back 5

Usually not done unless special conditions apply such as if one party has large medical bills may file separately because of 7.5% limitation.

Front 6

Head of Household

Back 6

Normally occurs in divorce situations.
One spouse maintains household for dependant children. This is a single mom's status as well. Also covers parents and parents do not have to live with you to get you head of household status.

Front 7

Abandoned Spouse

Back 7

If husband and wife don't live together for 6 months or more the one who is abandoned can file head of household as long as they have dependents

Front 8

American Opportunity Credit

Back 8

Applies to first 4 years of school.

Front 9

Life time learning credit

Back 9

Applies to years 5 and on

Front 10

Earned Income Credit

Back 10

This is the most abused credit and alot of people use fraud to obtain it. Due dilligence with this where you are liable for this and you may be banned from tax prep if you allow unqualifying people take this credit.

Front 11

Dependency exemption Qualifying child what tests must you meet?

Back 11

1. Relationship test
2. Abode test
3. Age test
4. Support test

Front 12

Dependency exemption Qualifying child relationship test

Back 12

Son, daughter, brother, sister, step brother sister and their dependents qualify.
COUSINS DO NOT QUALIFY. They are relative tests

Front 13

Dependency exemption Qualifying child abode test

Back 13

Must live with taxpayer for more than 1/2 year.

Front 14

Dependency exemption Qualifying child Age test

Back 14

Must be under 19 or age 24 as student.
To qualify as student must be enrolled in school at least 5 months full time.

Front 15

Dependency exemption Qualifying child Support Test

Back 15

Child must not be self supporting.

Front 16

How does qualifying relative differ from qualifying child deduction?

Back 16

Qualifying child is a tax credit. Can't take credit with qualifying relative.

Front 17

Qualifying relative what tests must you meet?

Back 17

1. Relationship
2. Gross income test
3. Support test

Front 18

Qualifying relative Relationship test

Back 18

Can be parent, grandparents, uncles, aunts, sons, father, mother, cousin, or just someone who lives with you.

Front 19

Qualifying relative Gross income test

Back 19

Dependent's income must be less than the dependency exemption. AKA amount must be less than 3700$

Front 20

Qualifying relative Support test

Back 20

Must pay more than 50% of support to qualify.

Front 21

Citizen/residency

Back 21

To be a dependent must be a US Citizen, resident, or resident of Canada or Mexico to be claimed for at least one day.

Front 22

What happens if you are disabled?

Back 22

If you are disabled, you can always be claimed.

Front 23

Social Security and medicare

Back 23

These are matched by employer. Congress allowed a 2% reduction in social secrity so employees pay 4.2% and employer pays 6.2%.

Front 24

What are 3 major deductions FROM AGI?

Back 24

1. Standard deduction or
2. Itemized deduction whichever is greater
3. Dependents

Front 25

How is the tax form laid out?

Back 25

Gross inncome
Deductions for AGI
AGI
Deductions from AGI
Taxable income
-tax credits
+other taxes
-withholdings
estimated taxes
additional tax credits

Front 26

Unearned income

Back 26

Passive income that you don't really do anything to obtain. Such as income limited to 300

Front 27

Earned income

Back 27

Income you actually earn such as wages, real estate income ect.

Front 28

Marginal tax rates

Back 28

What is my tax rate on one more $ of income. Every one more $ they make will be taxed at 25% or .25 cents out of every dollar goes to tax.

Front 29

Effective tax rate

Back 29

Takes into account how much income moves into each tax bracket. First 12,950 is taxed at 10%. The next 30,000 is taxed at 15%. It's a weighted average calculation.

Front 30

Why is effective tax rate important?

Back 30

Because it deals with effective tax planning.

Front 31

Government interest comes in 3 forms

Back 31

1. Federal. Taxable at federal level and tax exempt at state level.
2. State-taxable at state level and tax exempt at federal level.
3. Local-Federal and State exempt.

Front 32

Where is federal interest taxable? Where is it non-taxable?

Back 32

Federal interest is taxable at federal level and tax exempt at state level.

Front 33

Where is state interest taxable? Where is it non-taxable?

Back 33

State interest is taxable at the state level and tax exempt at the federal level.

Front 34

Where is local interest (municipal bonds ect) tax taxable? Where is it non taxable?

Back 34

Non taxable anywhere. Exempt from both federal and state taxes.
ALWAYS FEDERAL EXEMPT
State exempt is only for municipalities in which you live so if you buy KS bonds but live in MO must pay tax in MO.

Front 35

What is the catch with municipal interest?

Back 35

ALWAYS FEDERAL EXEMPT
State exempt is only for municipalities in which you live so if you buy KS bonds but live in MO must pay tax in MO.

Front 36

OID Interest

Back 36

Original Issue Discount
Often seen with savings bonds. Buy them for less than face value. Interest then makes it appreciate to the face value. IRS gives us 2 options to deal with interest accrued but we must be consistent.

Front 37

What are the 2 ways in which you can record OID interest?

Back 37

1. Can record on a yearly basis as taxable income
2. Can wait to record any income until you sell it.

Front 38

If something is OID non-taxable what does that mean?

Back 38

That means that you won't pay any taxes until you sell the bond.

Front 39

Why is it important to know the different methods of recording OID interest?

Back 39

This affects tax planning. If the rates wll be lower later such as if you save them until you retire and are in a lower tax bracket you may want to wait to cash them until then.

Front 40

Ordinary dividends

Back 40

Ordinary dividends paid by a co. These are taxed at the normal rate.

Front 41

Qualified dividends

Back 41

Usually a function of ordinary dividends. These truly affect your effective tax rate because ALL qualified dividends are taxed at 15%.

Front 42

Capital gain distribution

Back 42

This comes from mutual fund co. Mutual funds never get taxed b/c whatever income they have gets distributed to the owner/ This is your share of that capital gain. They are all listed at long term capital gain level.

Front 43

What rate are capital gains taxed at?

Back 43

Capital gains are taxed at 15%

Front 44

Collectibles what are they and what are they taxed at?

Back 44

Collectibles are gold, jewelry, things other than interest and dividends that you may invest in. Gains on these may affect effective rate.