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49 Cards in this Set
- Front
- Back
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Federal Income Tax Formula |
Income (broadly defined) Less: Exclusions Gross Income Less: Deductions for AGI (above-the-line deductions) Adjusted Gross Income ("The Line") Less: Itemized or Standard Deduction (below-the-line deductions) Less: Personal and Dependency Exemptions (suspended after 2017 Less: 20% deduction for QBI (after 2017) Taxable Income Tax on Taxable Income Less: Tax Credits Tax Due (or Refund Due) |
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Deduction vs Credit |
Deduction: reduces income Credit: reduces your tax |
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Partial List of exclusions |
Partial List • Interest income from municipal bonds • Child support payments received • Cash or property received by inheritance • Specified employee fringe benefits • Qualifying distributions from a Roth IRA • Alimony from post-2018 divorce (TCJA) |
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Partial list of exclusions continued |
Partial List, continued • Cash or property received by a gift • Deferral contributions to certain retirement plans • Gain on the sale of a principal residence (subject to limitations) • Scholarship or fellowship Life insurance proceeds received because of the death of the insured • Discharge of federal student loan indebtedness in tax years 2021-2025 |
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Deduction for AGI (Above the line) |
•Alimony paid * (before 2019) • Contributions to traditional IRAs • Interest paid on student loans • Contributions to SEP, SIMPLE or qualified plan • Contributions to Health Savings Account • Business expenses • Rental or royalty income expenses • Losses from the sale of business property •Moving expenses (military) |
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Deduction from AGI (Below the line) |
• Standard Deduction, or • Sum of: • Medical expenses • Interest Taxes • Casualty losses •Charitable deductions • Miscellaneous itemized deductions • Qualified Business Income (QBI) deduction |
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Partial list of itemized deduction |
• Charitable contributions • Home mortgage interest • Investment interest expense • State and local income taxes • Real property taxes on home •Property taxes based on the value of a car • Casualty losses in excess of 10% of AGI • Medical and dental expenses in excess of 7.5% of AGI |
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Partial list of itemized deduction (2 of2) |
Miscellaneous deductions subject to the 2% AGI limits: • Pursuant to TCJA 2017, all miscellaneous itemized deductions subject to the 2% floor are suspended until tax years beginning after December 31, 2025. Miscellaneous deductions not subject to the 2% AGI limits: • Amortizable premium on taxable bonds •Casualty and theft losses from income-producing property • Federal estate tax on income in respect of a decedent • Gambling losses up to the amount of gambling winnings • Impairment-related work expenses of persons with disabilities • Losses from Ponzi-type investment schemes • Unrecovered investment in an annuity |
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Partial list of tax credits |
• Foreign tax credit • Credit for child and dependent care expenses • Credit for the elderly or disabled • Education credits (American Opportunity and Lifetime Learning) • Retirement savings contribution credit • Residential energy credits • Child tax credit & other dependent credit • Earned income credit • Business and investment credits |
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REQUIREMENT FOR HEAD OF HOUSEHOLD STATUS |
• Unmarried as of end of year or an abandoned spouse. • Must pay more than ½ the cost of maintaining a household for a dependent relative for more than ½ the tax year. While a "dependent relative" may be someone unrelated to the taxpayer for purposes of determining dependency deductions, head of household status cannot be claimed if the taxpayers only dependents are those who are unrelated by blood or marriage. Exceptions: • Maintain a separate house for parents if at least one parent qualifies as a dependent. |
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Special Election: HOH |
• A married taxpayer may use a head of household filing status taxpayer: Is married files a separate tax return from the spouse maintains as his/her home a household which for more than half of the taxable year is the principal place of abode of a who is a dependent furnishes over one-half of the cost of maintaining the household the spouse is not a member of the household during the last 6 months of the year |
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Qualifying child test : Relationship |
• A qualifying child of a taxpayer must be: •The taxpayer's child, . A descendant of the taxpayer's child, • The taxpayer's brother, sister, stepbrother, stepsis brother, half sister, or A descendant of the taxpayer's brother, sister, step stepsister, half brother, or half sister. • Once a relationship is established by marriage, it continues even if there is a change in marital status. |
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Qualifying child tests: Abode, Age & Support |
Abode: • Child must live with the taxpayer for more than half the year. • Temporary absences (i.e., away at college) do not count Age Test • Under the age of 19 as of end of calendar year, or • Student under the age of 24 • Must be full-time student during 5 months of the year. Support Test • The child does not provide more than half of his or her support during the year. • If full-time student, scholarships are not considered. |
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Qualifying Relative test: Relationship |
Relationship Test • The taxpayer's child or a descendant of a child • The taxpayer's brother, sister, stepbrother, or stepsister • The taxpayer's parent or ancestor • The taxpayer's stepmother or stepfather • A child of the taxpayer's sibling (niece/nephew) • A sibling of the taxpayer's parent (aunt/uncle) cousin don’t count • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law of the taxpayer Any other individual (who may be a totally unrelated person) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer's household. A person who was married to the taxpayer during part of the year does not qualify. |
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Qualifying Relative Tests: Gross Income & Support test |
Gross Income Test • Dependent's gross income < exemption amount referenced in Section 152(d)(1)(B), which is $4,700 in 2023 ($4,400 in 2022). Social Security doesn’t count • Taxpayer must provide more than half of the dependent's support. |
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Kiddie Tax or Net Unearned Income (NUI) |
• Net unearned income of a child under age 19 with a living parent (up to age 24 if full-time student and can be claimed as a dependent) is taxed at the income tax rates attributable to the parent |
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FICA |
• Federal Insurance Contribution Act • Provides for old age, survivors, disability and hospital insurance • Social Security wage base limit is $160,200 (for 2023) • 12.4% total (6.2% to employee and 6.2% match by employer) Medicare tax not subject to wage base limit • 2.9% total (1.45% to employee and 1.45% match by employer) Total: 7.65% |
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3.8 Medicare Tax or Net investment income tax |
• Applies to the lesser of: 1. Net investment income, or 2. MAGI over threshold amount: • MFJ - $250,000 • MFS - $125,000 • Single - $200,000 Net investment income includes portfolio income, income from passive activities, gains on disposition of property, but does no include distributions from qualified plans or IRAs. Note: Threshold amounts are not indexed for inflation. |
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High Income Medicare Tax |
Additional Medicare tax equal to 0.9 percent of wages during any taxable year beginning after December 31, 2012, and which are in excess of: MFJ $250,000 • MFS $125,000 • Single $200,000 • This Medicare tax is paid by employees, not employers • Applies to wages, compensation or self-employment income |
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FUTA |
• Federal Unemployment Tax Act • Paid by employer only • 6.0% on first $7,000 of employee's wages |
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Self-Employment tax |
•FICA tax on earnings up to the wage base of $160,200 (for 2023) • Total = 15.3% • 2.9% beyond the wage base for Medicare tax* • Self-employed worker not required to pay FUTA on himself but is required to pay FICA. |
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Section 199A qualified business income deduction |
It applies at the individual level, so one business owner may be able to take the deduction while another owner of the same business cannot. Rationale The Section 199A deduction is a below-the-line deduction, so it does not reduce AGI. The deduction applies to income from pass-through business entities, including sole proprietorships, but does not apply to income from C corporations. The deduction is phased out based on the taxpayer's total taxable income (including the spouse's income if MFi). It applies at the individual level, so one business owner may be able to take the deduction while another owner of the same business may have a deduction that is partially or fully phased out. |
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Hobby Activity |
Hobby Activity • Income is included above the line • Expenses (after 2025) • Allowed only to extent of income . Deducted below the line (after 2025) Subject to the 2% floor • Unless deductible without regard to profit motive (such as mortgage interest & taxes) |
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Profit Activity |
Profit Activity • Deduct expenses above the line • At-risk and passive loss rules may apply |
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Types of Rental Real Estate |
•non-taxable - rented for less than 15 days. Augusta rule •primary rental use- owner doesn’t use it more than 15 days or 10% of rented days •mixed use - rented for more than 15 days or 10% of rental days |
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Non-Taxable Rental activity |
• Rental for less than 15 days • Income is realized, but not recognized • No expenses may be claimed • Mortgage interest and property taxes (up to $10,000) treated as personal expenses may be claimed on Schedule A (Itemized Deductions) |
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Primary Rental Use |
Characteristics • Rented for more than 14 days • Personal use is less than the greater of: • 14 days • 10% of rental days Tax Consequences • Income is recognized • All allocable expenses are deductible, even if it results in a loss • Ability to claim loss may be limited by passive activity rules |
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Mixed Use Rental Activity |
Characteristics • Rented for more than 14 days • Personal use exceeds the greater of:* • 14 days, or • 10% of rental days Tax Consequences • Income is recognized • Allocable expenses are deductible to extent of income • Tiered deduction rules apply • Unused expenses can be carried forward *Days of use by family members paying less than fair rental value are treated as personal use days. |
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Limitations of specific deductions |
• Bad debts •Worthless securities •Section 1244 stock • Losses of individuals • Research and experimental expenditures • Net operating losses (NOLs) • Depreciation |
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Bad debt’s limitations |
Business Bad Debts • Only deductible if accrual method of accounting is used Generally required to use specific charge-off method in year the debt becomes partially or wholly worthless .Some businesses can use the reserve method Nonbusiness Bad Debts • Specific charge-off method must be used Allowed only when debt is wholly worthless Always treated as short-term capital loss, regardless of the holding period • Related party debts are suspect, and are usually treated as gifts |
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Bad debt’s limitations |
Business Bad Debts • Only deductible if accrual method of accounting is used Generally required to use specific charge-off method in year the debt becomes partially or wholly worthless .Some businesses can use the reserve method Nonbusiness Bad Debts • Specific charge-off method must be used Allowed only when debt is wholly worthless Always treated as short-term capital loss, regardless of the holding period • Related party debts are suspect, and are usually treated as gifts |
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Worthless securities |
• Loss deduction allowed for securities that become worthless during the year. • Artificial Sale Date: Last day of the year in which the securities became worthless For individuals (cash-basis taxpayers), this is December 31st Causes holding period to be long-term unless the security was purchased during the year it became worthless or on the last day of the preceding year. |
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Section 1244 Stock |
• Stock may be classified as Section 1244 stock if: .It is held by an original investor in the company. .The initial capitalization of the company was $1 million or less. • Tax Treatment • If sold at a loss: • The first $50,000 ($100,000 for MFJ) each year is treated as an ordinary loss. Excess losses for the year follow normal capital loss rules. Section 1244 does not apply to gains. |
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Net Operating Losses (NOL) |
Carry forward indefinitely and offset income in current year |
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Excess business loss limitation |
The "excess" loss is the amount over $289,000 ($578,000 for joint return) in 2023. |
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Depreciation |
• Allowed for assets used in: • Atrade or business An activity for the production of income Return of capital • Personal assets and land are not depreciated. • Basis is returned to the owner when the property is sold. |
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RETIREMENT PLAN PENALTIES |
• Excess IRA Contributions Penalty (Too Much) •6% excise tax for contributing too much • If corrected by due date of return, does not apply |
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EARLY DISTRIBUTION PENALTY EXCEPTIONS |
Only IRAs •higher education expenses •first time home purchase $10k Both Qualified & IRA • Death • Attainment of age 59½ • Disability • Substantially equal periodic payments •(Section 72(t)) • Medical expenses that exceeds 7.5% of AGI • Tax levy • Qualified distribution up to $5,000 for birth or adoption |
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REFUNDABLE CREDITS VS. NONREFUNDABLE CREDITS |
Refundable Credits Paid even if the tax liability is less than the amount of credit (refund check) Nonrefundable Credits • Can only be used to offset tax liability • If credit exceeds tax liability, excess is lost • Exception: some nonrefundable credits have carryover (back +/or forward) provisions |
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CARRYBACK/FORWARD OF NONREFUNDABLE CREDITS |
• Carryback/forward provisions •Foreign Tax Credit: 1 year back, 10 years forward • Qualified Adoption Expense Credit: 5 years forward ($13k) •Residential Clean Energy Credit: carried forward General Business Credit: 1 year back, 20 years forward |
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FOREIGN TAX CREDIT |
• If foreign tax is paid, can claim: • Foreign Tax Credit, or • Itemized deduction • Limitations: • No credit for income excluded from U.S. income • No credit for foreign taxes imposed at higher than U.S. rates Carry back 1 year; forward 10 years |
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CHILD AND DEPENDENT CARE CREDIT (1 OF 2) |
General Qualifications • Must have employment-related care costs for a • Dependent under age 13, or •Dependent or spouse physically or mentally incapable of self care • Married taxpayers must file a joint return Credit Amount • Eligible care costs x applicable percentage • Applicable percentage ranges from 20% to 35% |
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CHILD AND DEPENDENT CARE CREDIT (1 OF 2) |
Both parents must work • Must have employment-related care costs for a • Dependent under age 13, or •Dependent or spouse physically or mentally incapable of self care • Married taxpayers must file a joint return Credit Amount • Eligible care costs x applicable percentage • Applicable percentage ranges from 20% to 35% |
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CHILD AND DEPENDENT CARE CREDIT (2 OF 2) |
• Covers costs for care of qualified individual within taxpayer's home or outside home. • If outside home, dependent or spouse incapable of self care must spend at least 8 hours a day within taxpayer's home. • Amount of costs that qualify is the lesser of Earned income, or •Actual costs, or • $3,000 for one qualified individual, and $6,000 for two or more qualified individuals. • Special Rules •If spouse is full-time student, deemed to earn $250 per month (or $500 per month if 2 or more qualifying individuals) |
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2 Education Credits: • American Opportunity Tax Credit • Lifetime Learning Credit |
Common Elements: • Available for qualifying tuition and related expenses • Room and board costs are not eligible • Available for taxpayer, spouse, and dependents • Course materials (including books, supplies, and equipment needed for a course of study) are considered qualified related expenses for the American Opportunity Tax Credit but are not for the Lifetime Learning Credit unless required by and paid to the education institution as a condition of enrollment or attendance |
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AMERICAN OPPORTUNITY TAX CREDIT |
• Maximum per eligible student is $2,500 per year for first 4 years of postsecondary education. • 100% of first $2,000 of qualifying expenses, plus • 25% of next $2,000 of qualifying expenses • Student must: •Pursue an undergraduate degree or recognized credential • Take at least 1/2 of full-time course load •Have a tax ID number issued prior to the due date of the return on which the credit is claimed •Not have any felony drug conviction |
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LIFETIME LEARNING TAX CREDIT |
Used when you can’t use AOTC • Maximum per taxpayer is 20% of qualifying expenses (up to $10,000 per year). Cannot be claimed in same year the American Opportunity Tax Credit is claimed for the same student. • Student must take one or more courses. • Felony conviction for possessing or distributing a controlled substance does not impact the Lifetime Learning Tax Credit |
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ADOPTION EXPENSE CREDIT (1 OF 2) |
• Credit for qualified adoption expenses incurred in adoption of eligible child. • Examples of expenses: adoption fees, court costs, attorney fees, travel expenses • Maximum credit is $15,950 for 2023. • Credit is phased out ratably for modified AGI between $239,230 - $279,230 for 2023. |
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ADOPTION EXPENSE CREDIT (2 OF 2) |
•Eligible child is one that is: Less than 18 years of age, or • Physically or mentally handicapped • Nonrefundable credit •Excess may be carried forward for five years |
