Mac 740 - Individual Income Tax - Part 1

Front 1

_______ is defined as a government's attitudes, objectives, and actions with respect to its tax system.

Standards for a good tax:
1. ________________
2. ________________
3. ________________
4. ________________

Back 1

Tax policy

1. Sufficient to raise gov't revenues
2. Convenient to admisinter
3. Efficient
4. Fair to taxpayers

Front 2

1. Sufficiency

(this means that the gov't ____________. If it doesn't, the gov't must make up this revenue shortfall by _______, and thus accruing more ______. (US: deficeits for past 40 years, except 2000, 2001).

Tax equation?

How to raise tax revenues?
1. ______________ (______)
2. ______________ (______)
3. ______________ (_____)

2 methods for forecasting revenues:
1. ______________
assumes that __ is ____ of __.
2. ______________
assumes that ___ affects ___. Hard to isolate effect to test. 2 possible behavioral responses to rate changes:
a. ___________ - assumes taxpayers worker harder to maintain after tax income. (stronger for primary wage earner, low-income)
b. ___________ - assumes taxpayer substitues labor and lesuire (strongest for high income earner, 2nd wage earner)

Back 2

balances the budget; borrowing money; interest payments;

T (tax) = r x B (base)

1. Exploit a new base (politically unpopular)
2. Increase rate of base (politically unpopular)
3. Enlarge existing base (subtle)

1. Static Forecasting; r is independent of B
2. Dynamic Forecasting; r affects B

a. Income effect
b. Substitution effect

Front 3

2. Convenience:

Should be convenient to ______ and to _____. The IRS operates on ______ of every ____ it collects. Sales tax is incredibly easy to to collect and offers little room for non compliance. However, federal taxs are complex and not easy to pay.

3. Efficient

According to classical definition, an efficient tax is one that is _________.
According to the Keynesian definition, an efficient tax is one that ______________.
The US gov't clearly advocates the _______ definition of efficiency. This helps them remedy the byproducts of the free enterprise system, or ___________. The gov't can also target subsidies they deem desirable. Examples? These incentives are known as ___________. They do not raise money for gov't, ergo, technically they are ___________. Opponents of tax preferences argue that their cost to the gov't is therefore overlooked, and hence an annual ___________ that __________.

Back 3

administer; pay; .40 cents; 100 dollars;

neutral in the market; regulates the economy; Keynesian; negative externalities; Tax break on restoration of historic buildings; Tax break on state and local debt obligations; tax preferences; indirect gov't expenditures; Tax Expenditures Budget; quantifies the revenue loss from each major tax preference.

Front 4

4. Fairness

Each person's contribution to the gov't should reflect their _________. Ie. income tax based on inflows, sales tax based on amount of resource consumption.

___________ - concerned with impartial measurement of the tax base's ability to pay. This is enhanced by refining the calculation of taxable income to reflect ____________. (this also adds to complexity). The annual (12 month) measurement of ability to pay may bear little relationship to a person's _____________. Example? Tax preferences can also distort horizontal equity. Example? If eliminate all tax. pref., increase _______, but lose ________

_________ - concerned more with a fair rate structure. A tax is ________ if taxpayers with a greater base owe _____ than taxpayers with a lesser base. This is obvious, but real question is how much more the rich should pay:
- _____ tax - r increase as B decr.
- _____ tax - r same for all B (seems fairest, but remember ______________ - econ)
- _____ tax - r incr. as B incr. (fairest)

Back 4

Ability to pay;

Horizontal Equity; economic circumstances; lifetime ability to pay; Ex: A wealthy man making 300,000 / year, pays same tax a blue collar lottery winner, who gets 300,000 once and earns 35,000 every other year.
Ex: Two business that make same profit, get difference TI because of tax preferences.
horizontal equity; social benefits.

vertical equity; vertically equitable; more; regressive; proportionate; decreasing marginal utility of income; progressive;

Front 5

It is important to make the difference between the tax rates:

1. _________ - tax on next dollar of income.
2. _________ - Tax paid / taxable income
Under a ________ rate structure, these two are the same.

Back 5

Marginal tax rate; Average tax rate
Proportional;

Front 6

Every individual in the US may be required to file a tax return. One of the first items of info is _______, which reflects an individual's marital and family situation. It affects the calculation of taxable income. (when certain deductions / credits phased out and rate income is taxed)

1. ______ - default status for ____ individuals (including ____ / ___). If a couple divorces, their status changes to this immediately.
2. ______ - individual who is ____ on the last day of the year who also maintains a home that is the _______ for a ______ .
3. _______ - a couple who have _________ for their tax bill (each spouse _______ )
4. ________ - couple might derive a negligible tax benefit from this status, but usually ______ tax rates. (Must file #3 or #4 if married __________ )
5. ________ - If spouse dies, the widow(er) must file ______ in the year of death and then able to file ________ for ______ if there is a ______ who the _______. (not eligible if widow _____). This rate is ____ for a single person.

Back 6

filling status;
1. Single; unmarried; dependents / children
2. Head of Household; unmarried; principle residence; child or dependent family member;
3. Married Filling Jointly; joint and several liability; responsible for paying entire tax
4. Married Filling Separately; less favorable rates; on the last day of the year;
5. Surviving Spouse; joint return; Surviving Spouse; 2 years after; dependent child; widow maintains home for; remarries; MFJ

Front 7

Taxable Income (4 steps):

1. ___________
2. ___________
3. ___________
4. ___________

Step 1: Calculate Total Income:

This includes:
1. Schedule C (net profit from a _________)
2. Schedule E (_____ from a _____ or __ corporation),
3. _______ payments
4. income from the individual's _____.

Back 7

1. Calculate Total Income
2. Calculate AGI
3. Subtract the greater of itemized deductions or standard
4. Subtract total exemptions

sole prop.; E; net profit; partnership; S; salary; investments;

Front 8

Step 2: Calculate AGI:

This equals _____ less specific ____________. This number is very important because many _______ and ______ are limited by this number. This is the closest gauge of _______. One extra important ABL deduction: 1/2 of ________!!!

Step 3: Subtract greater of standard deduction or itemized deductions.

2009:
For individuals / MFS: ______
MFJ / SS: _______
HOH: ______

Individuals who reach ___ receive an additional _____ (each) if MFJ and an additional ______ if single / HOH.

Individuals who are _____ also receive an additional deduction identical to the one above.

There is a limited standard deduction for a _______ . In 2009, the standard deduction (capped at $5700) for a dependent may not exceed the ____ of (1) ____ or (2) the dependent's _______ (_____, etc) + $_____.

Example: Child has $3000 in wages, $800 in interest income. Standard deduction?

Back 8

Total Income - above the line deductions; deductions; credits; disposable income. Self-Employment tax

5,700
11,400
8,350

65; $1,100, $1,400;

blind;

dependent; greater
1. $950
2. earned income (wages, salary, etc) + $300

Ex: Standard deduction = greater of (1) $950 or (2) earned income (wages, etc) + $300.;

$3000 + $300 = $3300

Front 9

Itemized deductions

Reported on Schedule ___. Only about 30-35% of taxpayers elect to do this.

A deduction listed as _______ always reduces taxable income. If it is _______ it might have an impact on taxable income. _____ determines which get classified where.

_____ - if itemized deductions are about equal to standard deduction, claim more deductions on alternate years to get a tax benefit. As a cash-basis taxpayer, you can postpone _____ until the ________.

Back 9

A;

above the line deduction; itemized; Congress

Bunching; payments; following year;

Front 10

Step 4: Subtract exemption amounts:

Last step is AGI is reduced by exemption amount (_______ in family). In 2009, this is $_______. This consists of the ______ (2 for ____) plus the _______ .

A dependent must either be a _______ or ________. They may not _________ and must be a _____ OR _____ of the ____, ______ or ______.

Qualifying Child Exemption:
a. (relationship) taxpayer's ____, ______, ______ (including _____), and their ______.
b. Must have had the same _____ _____ for more than ____ of the year.
c. Must be less than ___ years old or ___ years old if student. (Cannot be ____ than ____). (Age requirement waived for permanently disabled).
d. Child must not have provided more than ___ of ____________ (can be from ______)
e. If married, have to receive refund for joint return.

Back 10

number of people; $3650; taxpayer; MFJ; dependents;

qualifying child or relative; file a joint tax return; US citizen; resident; US, Mexico, Canada;

a. child; descendant; siblings (stepsisters;bros); descendants;
b. principal residence; 1/2;
c. 19; 24; older than taxpayer;
d. 1/2; OWN FINANCIAL SUPPORT for the year (others)

Front 11

Qualifying Relative Exemption:
a. (relationship) - any primary family (____/_____, ______), OR anyone who is _______________
b. The person's gross income must not __________.
c. Must receive ____ of ______ from _______.
*** _______ does not count for ______ test but it does for ______ test.

,

Anyone claimed as a dependent, may not get a ______ on their return.

A progressive income tax system that allows married couples to file joint returns can be _________ or ___________, but not both. There is a marriage penalty past the ___ tax bracket.

The marginal tax bracket for high income earners might not be as low as one would think. This is known as the ____________. This is due to _____ when ____ becomes _____.

Back 11

a. aunt/uncle; in-laws; a member of the household for a year;
b. exceed the exemption amount;
c. 1/2 of financial support from taxpayer;

Social Security income; gross income; financial support;

may not get an exemption on their tax return

marriage neutral; horizontally equitable; 15%

Elusive Marginal Tax Rate; Phase-outs of deductions and credits; AGI; too high;

Front 12

Credits = reduce tax directly.

Child Credit - $______ for each qualifying child under age of ___.

________ ____ Credit. For dependents who are under the age of ___ or dependents who are incapable of _________. This is to recompensate for caregivers or daycare costs. The limit for the daycare costs is limited to $3000 if ________, and $6000 if __________. The limit is reduced further if ______________ is less than the aforementioned limits. The credit itself is equal to a percentage times the amount of the limitation. The percentage is based on ___. The percentage starts at 35%. For every $_____ over $15000 the percentage is reduced by ___. The lowest the percentage can go is ___.

Example: Husband and wife each make $15,000 each spend $5000 on child care; no ABL deductions; 3 kids < 13 years old; Care credit?

Back 12

$1000; 17;

Dependent Care; 13; caring for themselves; taxpayer has 1 dependent; taxpayer has 2 or more dependents; the husband or wife's (or single taxpayer's) earned income; AGI; $2000; 1%; 20%

$5000 limit
AGI = $30,000
- $15,000
Excess AGI = $15000
Reduction = 7.5
(round up Reduction) = 8%
35%-8% = 27%
$5000 x 27% = $1350 Dependent Care Credit!

Front 13

EITC

Meant to offset ______ burden for low income (______ must ______) and to encourage poor to work instead of relying on welfare. Phases out with income increase and more for families ______. The EITC is ______, meaning taxpayers may receive a _____ of the ____ that exceeds _____.

Excess __________.

When employee switches jobs, the employer must _________ regardless of ____________. (ie. the SS tax + Medicare). It is the ______ responsibility to receive this _______ on their _________. (more relevant for __________________)

Back 13

payroll tax; employers must whithold; with children; refundable; refund; credit; tax;

Payroll tax withholding; withhold payroll tax; previous tax paid; employee's; credit; personal income tax return; (high income earners because of the $106,800 cap on SS tax).

Front 14

AMT - __________ - ensures high income earners who indulged in excessive _________ will pay fair share. Point of contention = AMTI threshold rates are not _________, therefore "middle-class" affected. (Even though Congress temporarily indexes the exemption amount by inflation. Most projections assume the temporary patch will not be in place and the exemption for MFJ will fall to $45,000 - not true)

Calculation:
Start with ______
+/- ________ / _________
+ ________ (certain itemized deductions)
= _____ before ______
- __________
= _______
x ___ % for first _______
x ___ % for the rest
= _________
(look at ____ vs. _____ and if ____ is higher, then the difference is paid to gov't and called ____.

Individuals can carryforward some of the AMT as a credit against future regular tax.
Ex: AMT in 09: $3000
AMT Credit allowed: $1000
If reg. tax in '10 is $4500 and TMT is $4000. How much pay in taxes?

Back 14

Alternative Minimum Tax; tax preferences; indexed for inflation;

-Taxable income
-Standard deduction / exemption amount
-Preferences
-AMTI before exemption
-Exemption (don't forget phase out)
-AMTI
x 26% for first 175000
x 28% for rest
= TMT (Tentative Minimum Tax)
regular tax vs. TMT; TMT; AMT;

$4000. (Used $500 of $1000 AMT credit carryover)

Front 15

Individuals are required to pay income tax __________. While ____ are _______ from paychecks for federal tax withholding, ________, ________, and ________ must be paid _________. _______ means on ____ 15th, ______ 15th, ______ 15th, and _______ 15th.

An _________ can be avoided by paying ____ of current year tax. The law allows a ________ estimate. Individuals with AGI < $________ can avoid penalty by paying _____ of their PY tax liability. Individuals with AGI > $________ can avoid penalty by paying _____ of their PY tax liability. (don't have to pay these immediately, can pay the safe harbor estimate quarterly).

Individuals can request a ___ month extension of a filing deadline (10/15). This applies to the filing requirement, not the _________.

Back 15

throughout the year; taxes; withheld; profit from sole proprietorship; profit from partnership; and investment income; "quarterly"; "Quarterly"; April 15th; June 15th; September 15th; January 15th;

underpayment penalty; 90%
safe harbor; 150,000; 100%; 150,000; 110%;

6; payment of tax

Front 16

Section 61 of the IRC states that gross income means all income from __________.

Personal / Gratuitous receipts:
- _________ are taxable. (Need not be in _____ - ____)
- _________ are excluded to the extent _________________. (ergo _____ is taxable)
- Major exception: ______, ______ and ____. Don't report these as taxable income.

Legal Settlements:
_______ unless they are compensation for _____ or _____.

Government Transfer Payments:
_______ like _____ and food stamps are nontaxable. _______ compensation is taxable.

Social Security = taxable?
Controversial because not supposed to be based on financial need, but they paid nondeductible taxes to receive this. For poorer families, SS income isn't taxable, otherwise, ___ or ___ of Social Security income is taxed, depending on income level.

Back 16

whatever source derived;

prizes and awards; cash, vacations; scholarships; they pay for tuition, fees, books, and equipment; room and board; gifts, inheritance, and life insurance proceeds;

taxable; illness or injury;

need-based payments; welfare; unemployment

50%; 85%

Front 17

Divorce:
Transferring property: no _____ or ______ recognized on transfer but the ________ is ______.

Alimony - payer ______ (_____ deduction) and receiver _______.
Child Support - payer ________ and receiver _________.

Personal Assets = always classified as ____ assets (except for ______ assets in which the _________ - ordinary income). Personal use assets cannot be _____. Losses from sale of personal use assets are _______ (happens most of the time because assets not written down). If gain results, it is _____ and either ______ or _______.

Back 17

income; gain/loss; tax basis; adjusted;

deducts from income; above the line; recognizes income; gets no deduction; doesn't recognize income;

capital; creative; creator still owns; depreciated; non-deductible; capital gain; short-term CAP gain; 28% LT capital gain;

Front 18

No ABL deduction is allowed for personal, living or family expenses. HOWEVER, itemized deduction:
1. ________
The medical expense deduction is limited to the ______ of total unreimbursed expenses over ___ of ____. Medical expenses include:
-Doc visits
-Hospital stays
-Medical aids
-__________
- _________ (if ________)
- __________

2. ________
Individuals may deduct real or personal ______ tax (like on _____ or _____ - no limit). Individuals may deduct either _________ or _________. Individuals may deduct fees from __________ as a misc. deduction.
Some taxes are not deductible like:
- ____ and ____ taxes
- _________ taxes
- ________ for household employee (_________)
- ___________ of course.

3. ________ (later)

Back 18

itemized

1. Medical Expenses
excess; 7.5%; AGI;

- Prescription drugs
- Medical insurance premiums (if taxpayer pays for it)
- Travel and parking expenses

2. Local, state and foreign tax;
property; cars or houses; state and local income tax; state and local sales tax; tax preparation;

Gift and estate taxes;
Employee payroll taxes;
Employment taxes (FICA); like maids or nannies;
Federal income tax;

3. Home mortgage interest;

Front 19

Itemized deductions:

4. Charitable deductions
If giving cash, can deduct up to ____ of ____. If this limit is exceeded, it can be carried forward for ____ years. If _____ is contributed, then the limit for deduction is ____ of ____. If this property is LT capital asset, then amount is _____. (this helps to _______). If this prop. is not LT cap. asset, then amount is __________.

Back 19

50% of AGI; 5; property; 30%; AGI; FMV of property; avoid capital gains for appreciated assets; lesser of cost and FMV of property;

Front 20

Tax subsidies for Eduction

1.__________ - can exclude INTEREST from earned to the extent ________
2. ____________ - ABL deduction (limited to _____)
3. ____________ - ABL deduction (limited to _____) - can use proceeds for _____.
4. ___________ - eligible for ______ of post-secondary school. Limit = _____ per _____

OR claim the _________ - based on ____ of _______. Maximum credit is ______ per _____. Can be used for ______.
5. ___________ - can contribute ________ every year for beneficiary under _______. Can be used for ______ and college.
6. ___________ sponsored by state and private colleges. Distributions are tax exempt.

Back 20

1. EE Savings Bonds; it covers tuition and fees;
2. Qualified tuition / fee deduction; $4000
3. Interest on qualified loans deduction; $2500; room and board;
4. American Opportunity Credit; 1st 4 years; $2500 per child; Lifetime Learning Credit; 20% tuition expenses; $2000 per return; grad school (ie. > 4 years).
5. Coverdell education savings account; up to $2000; 18 years old; private school;
6. Qualified tuition programs;

Front 21

Personal Losses

Even if loss is on _______, it is not deductible.

Casualty and Theft Losses = must be _____ and ______.

FOR EACH LOSS
1. The loss allowable is lesser of _________ or _______. (ie. motocycle bought for 20, appreciated to 25, totaled in wreck. Loss = 20.)
2. The loss is reduced further by any _________ so that only the ________ amount is deductible.
3. Lastly, the loss is FURTHER reduced by a ___ floor
4. FINAL the loss recognized is only that in excess of ______.

Deduction = _____ - ____ - ____

Back 21

personal home;

sudden and unexpected;

1. tax basis; decline in FMV;
2. insurance proceeds; unreimbursed amount;
3. $500
4. 10%

Loss - $500 - 10% AGI

Front 22

Hobbies:

Hobby income is _______. Hobby deductions are _______, but as ________ (these are not deductible to the extent they are less than ___ of ___) and the hobby loss is limited to the amount of ________. If activity _______ for __ of the last __ years, then considered ________. (this is favorable because one can ________ net ____ from _____).

Gambling:

Treated very much like hobby activities. Gamb. winnings are taxable and losses are deductible to the extent of income. * only exception: ______________, therefore not subject to __________ (still itemized).

Back 22

taxable; deductible; misc. deductions; 2%; AGI; hobby income; generates a profit; 3; 5; a business; deduct; loss; AGI;

Not classified as misc. deductions; 2% of AGI limitation;

Front 23

Home Ownership

imputed ____ from ________: This is the benefit that a homeowner receives from not having to pay a rent expense and taxes on income to pay that expense.

Home Mortgage Interest Deduction:

The following are itemized deductions:
- Interest on ______ debt (_____ and ______) up to ______
- Interest on ________ debt up to ________. (These amounts are for ___, halve for all others).
Taxpayers may take into account only _______ (1 _________).

Vacation home rental:
If personal use of home exceeds the _____ of _______ or ________, then deductions treated as a vacation home (instead of rental - _________). Vacation home deductions are limited to the _______ less the ________ and ________ (allocated to the rental period). Can deduct maintainance, ________, etc... but cannot generate a ______ (can _______ excess ______).

Back 23

imputed income from owner-occupied housing;

acquisition (buying and renovations); $1,000,000; home equity; $100,000; MFJ; 2 residences; must be principal;

greater; 14 days; 10% of rental days; where you can deduct everything; gross rent received; mortgage interest and property taxes; depreciation; net loss; carry forward; deductions;

Front 24

Gain on Sale of Residence

Allowed to exclude $________ of gain on sale if home is principal residence ________. Only allowed to exclude 1 gain every _____. If married, allowed to exclude _______ if ____ spouse(s) meet the ________ requirement and _____ spouse(s) meet the _________ requirement.
Exception to the rule: if person's principal residence <2 of 5 years and sold residence because of ______, _______ or because of __________, allowed a _______ exclusion.

Itemized deductions as AMT adj.

Almost everything added back in except:
- _________ only to the extent they exceed ____ of ____.
-_______ debt for mortgage interest.
-________ contributions

Back 24

$250,000; 2 of the last 5 years; 2 years; $500,000; either; ownership; both; use;

change in place of employment; health reasons; unforeseen circumstances; pro-rated;

Medical expenses; 10%; AGI
Acquisition
Charitible