This site is 100% ad supported. Please add an exception to adblock for this site.

Individual Income Tax Ch 3


undefined, object
copy deck
Individuals are subject to Federal Income Tax based on
The basic rate structure is ____ with rates varying from __ to ___%
The highest taxes rates were in ____ with rates varying from ____ to __ %
Income (broadly conceived) includes
all the taxayer's income, both taxable and non-taxable
Income (broadly concieved) does not include
return of capital
receipt of borrowed funds
gross income is defined by the IRS as
except as otherwise provided... all income from whatever source derived
gross income does not include
unrealized gains
Individual taxpayers have two categories of deductions
deductions FOR adjusted gross income

deductions FROM adjusted gross income
examples of deductions FOR adjusted gross income include
ordinary and necessary expenses incurred in a trade or businsss, one half of self employment tax paid, alimony paid, certain payments to an IRA and Health savings accounts, moving expenses, forfeited interest penalty for premature withdrawl of time deposits, captial loss deductions
deductions for AGI are sometimes known as
above the line deductions
the basis for computing percentage limitations on certain itemized deductions
Adjusted Gross Income
The AGI is used for computing % on certain itemized deductions such as
medical expenses
charitable contributions
casualty losses
medical expenses are deductible if they exceed ?% of AGI
Charitable contributions deductions may not exceed ?% of AGA
tHe standard deduction is the sum of two components
the basic standard deduction
the additional standard deduction
The following individual taxpayers are NOT allowed to use the standard deduction and must itemize
A married individual filing a separate return where either spouse itemizes deductions

a nonresident alien

an individual filing a return for a period of less than 12 months because of a change in the annual accounting period
When filing his or her own tax return, a dependents basic standard deduction in 2006 is limited to the greater of _____ or the sum of the individual's earned income plus ___; but if the amount exceeds the _____ the standard deduction is limited to $5150
$850, $300 normal standard deduction
exemptions that are allowed for the taxpayer and spouse are called
personal exemptions
An individual cannont claim a personal exemption if
he is claimed as a dependant by another
When a husband and wife file a separate return, a married taxpayer cannot claim an exemption for his or her spouse unless
the spouse has no gross income and is not claimed as the dependant of another taxpayer
a ___ is available for either a qualifiying child or qualifying relative
dependency exemption
The qualifying child definition applies to the following tax benefits
dependency exemption
head-of-household exemption
earned income tax credit
child tax credit
credit for child and dependent care expenses
a qualifying child must meet the __,__... tests
the relationship test for qualifying child includes a taxpayer's..
child, adopted child, stepchild, eligible foster child, brother, sister, half brother, half sister, stepbrother, step sister, or a DESCENDANT of any of these parties
Abode test requires
that qualifying child must live with the taxpayer for more than half of the year
the age test requries that a qualifying child must be under the age of ___ or ___ in the case of a student
19 or 24
the age test does not apply to
any child who is disabled during any part of the year
the support test requires
that the child must not provide more than one-half of his or her own support
begins with
Income (broadly conceived)
next line after income
next line after Less:Exclusions
Gross Income
next line after
Gross income
Less: Deductions for adjusted gross income
next line after
Less: Deductions for adjusted gross income
Adjusted gross income
next line after
Less: The greater of total itemized deductions or the standard deduction
Personal and dependency exemptions
next line after Adjusted gross income
Less: The greater of total itemized deductions or the standard deduction
next line after
Personal and dependency exemptions
Taxable income
next line after
taxable income
Tax on taxable income (see tax tables)
next line after Tax on taxable income (see tax tables)
Less: Tax credits (including income taxes withheld and prepaid)
next line after Less: Tax credits (including income taxes withheld and prepaid)
Tax due (or refund)
In order for the dependent to be a qualifying child the taxpayer must meet these characteristics for the support test
provide more than one-half of his or her own support
in the case of a fulltime student, ____ are not considered to be support
the tiebreaker rules state that when both people are the parents and the child lives ith each the same period of time...
the parent with the higher AGI claims the qualifying child
Resorting to the tiebreaker rules for claiming a qualified child is not necessar if ...
the person who would prevail does not claim the exemption
a qualifying relative must meet the following test
gross income
an ex spouse can qulify as a member of the household..
in the year following that of the divorce
a qualifying relative relationship test includes...
Lineal ascendants (parents, grandparents)
Collateral ascendants (uncles, aunts)
Certain in-laws (child, parent, sibling in-law)
and unrelated parties who LIVE WITH the taxpayer,
except for spouses in year of divorce.
a dependent's gross income must be less than the ___ which is __
exemption amount $3300
In the case of scholarships when determining wheter the dependent meets the gross income test include ___ and exclude___
taxable portion(amounts for room and board)
nontaxable portion(amounts for books and tuition)
In the case of the qualifying relative support test, over one half the support of the qualifying relative must be supplied....
furnished by the taxpayer
For the purpose of the support test, recieved funds do not have to be claimed when
funds that have been received from any source do not have to be counted if they are not spent
When a group of people provides support for one person the following determinations must be made
the group together must provide 50 percent of the support

any person who contributed more than 10% of the suppport may claim the deduction providing everyone else who claimed more than 10 files written consent (form 2120)

each person in that group must meet all the other requirements for claiming the exemption-except support
A special exception to the support test that applies to parents with children who are separated, the parents must meet these conditions
provide more than half of the support

have custody of the child for more than half the year
The special rule grants the dependecy exemptions to the noncustodial parent if
the divorce decree specifies or
the custodial parent issues a waiver
If the special rule granting dependency does not apply to the situation and support may have to be determined the following rules as to source govern
alimony received by the custodial parent does not count as support by the payor parent

If a parent has remarried, amounts received from the parents spouse are considered to be provided by that parent
In addition to fitting into either the qualifying child or the qualifying relative category a dependent must meet the
joint return and citizenship or residency tests
If a person is married, the supporting taxpayer is generally not permitted a dependency exemptions if the married individual files a joint return with his spouse, but this does not apply unless
the reason for filing is to claim a refund for tax withheld

no tax liability would exist for either spouse on separate returns

neither spouse is required to file a return
To be a dependent the individual must be __ except for the following situation
either a US citizen, a US resident, or a resident of Canada or Mexico; an adopted child need not be a citizen or resident of the US as long as her principal residence is with a US citizen.
In testing for dependency exemption, in the case of a qualifying child ____ is not necessary; What is required is that
support; the child not be self supporting
In testing for dependency exemption, the qualifying child category has no____ limitation, where the qualifying relative category has no____
gross income limitation; age restriction
The repeal of the exepmtion phaseout was postponed until; and will not be complete until;
Exemptions are phased out by ___ for each ____ by which the taxpayers AGI exceeds the threshold amounts
For married taxpayers filing separately Exemptions are phased out by ___ for each ____ by which the taxpayers AGI exceeds the threshold amounts
Steps for calculating the exemption percentage phaseout
1 AGI-Threshold=excess
2 Excess/2500(or 1250MFS)*.02
3 Phaseout percentage*exemption amount= amount of exemptions phased out
4 Amount of exeptions phased out*reduction of phaseout fraction=phaseout amount
5 Exemption amount-phaseout amount=allowable exemtption deduction
The child tax credit is___ through ___ for each dependent child under the age of ___
The following taxpayers may not use the tax table method
Individual who files a short period return
Individuals whose taxable income exceeds the max amount in the tax table
An estate or trust
Prior to 2001 tax legislation, the tax rate schedules were ___; The rates were reduced to __
15,28,31,36, and 39.6%; 10,15,25,28,33,and 35%
The average rate of tax is equal to the ___
tax liability/ taxable income
Some of the common tax credits
earned income credit
credit for child and dependent care expenses
credit for the elderly
foreign tax credit
Child tax credit
Unearned income includes
taxable interest
capital gains
pension and annuity income
income received as the beneficairy of a trust
the kiddie tax applies when
child has not yet reached age 14 by the close of the year
has at least one living parent
unearned income of more than 1700
net unearned income of a dependent child is computed as follows
Unearned income
Less 850
Less The greater of
-850 of the standard deduction or
-the amount of allowable itemized deductions directly connected with the production of the unearned income
Equals: Net unearned income
To reduce the tax savings that result from shifting income from parents to children the ____ of certain minor children is taxed as if it were the parents' income .
Net unearned income
If the net unearned income is zero, (or negative)the..
tax is computed without using the parents' rate. If the amount is positive, the NET unearned income is taxed at the parents' rate.
What are the options for filing a return when a child under the age of 14 has net unearned income
a separate return may be filed for the child
the parents may elect to report the child's income on their own return
If a separate return is filed for a child subject to the kiddie tax, the tax on net unearned income (referred to as____) is computed..Form___ is used to compute the tax
allocable parental tax; as though the income had been included on the parents return; 8615
The requirements for reporting the childs unearned imcome on the parents own tax return
gross income is from interetst and dividends only
gross income is more than 850 but lses than 8500
no estimated tax has been paid in the same name and social security number as the child
the child is not subject to backup withholding
If the parental election is made in regards to kiddie tax
the child is treated as having no gross income and is not required to file a tax return
If the parents are divorced, the taxable income of__ is used to determine the allocable parental tax
For the purpose of kiddie tax, when parents are filing separate returns, the individual with the___ is the parent who may elect to report the childs unearned income
greater taxabe income
Under the category of filing considerations, the following questions need to be resolved
is the taxpayer required to file an income tax return
Which form should be used
When and how should the form be filed
In computing the tax liablity, which column of the tax table or which tax rate schedule should be used
An individual should file a tax return if
he has gross income that exceeds or equals the sum of the exemption amount plus the applicable standard deduction
THe additional standard for being age 65 or older is/isn't considered when determining the gross income filing requirements,
the additional standard deduction for blindness is/isn't considered when determining the gross income filing requirments
A ___ must file a tax return regardless of the amount of gross income
self-employed individual with net earnings of $400 or more
Computation of the gross income filing requirement for an individual who can be claimed on another person's tax return involves determining if they have any
earned income only and gross income that is more than the total statndard deduction (including any additional standard deduction)
Unearned income only and gross income of more than 850 plus any additional standard deduction that the individual is allowed
Both earned and unearned income and gross income for more than the larger of the 850 or the sum of earned income pluse $300(but limited to the applicable basic standard deduction) plus any additional standard deduction allowed
The filing requirment for a dependent who has no unearned income is the total of the basic standard deduction plus any additional standard deduction which includes
both the additional deduction for blindness and being 65 or older
THe 1040 EZ cannot be used if
taxpayer claims any dependents
taxpayer (or spouse) is 65 or older or blind
taxable income is 100,000 or more
The 1040a cannot be used if
taxpers decide to itemized deductions from AGI
ERO are
tax professionals who have been accepted into the electric filing program by the IRS (electronic return organizers)
If a US military family is outside the US but not in a combat zone, the filing date is extended to -- if taxes are due then interest starts to accrue
June 15;april 15
If a US military member is in a combat zone, the filing date is ___ after___. Interest starts to accrue
180 days after teh last day of combat service, interest never accrues. THIS APPLIES TO MARRIED FILING JOINTLY AS WELL
When the due date falls on a __ the last day for filing is__
Saturday, sunday or legal holiday; the next legal business day
If an individual taxpayer needs to file an amended return form ___ is used. It must generally be filed within __ of the filing date of the original return, or __ from when the tax was paid, whichever was later
1040 x; three years, two years
Marital status is determined when__ except when the spouse dies, then the marital status is decided when__
at the last oday of the tax year; at the date of death
What are some examples of limitations the code places on married persons who file separate returns
if either spouse must itemize, the other spouse must also itemize
the earned income credit and the credit for child and dependent care expenses cannot be claimed
no deduction is allowed for interest paid on qualified education loans
only 1500 of excesss captial losses can be claimed
the__ rates also applies for __ years following the death of one spouse, if the surviving spouse__
joint return; two; maintains a household for a dependent child, who must be a SON, STEPSON, who qualifies as a dependent
In the year of death the surviving spouse is
treated as if married
to qualify for HOH rates a taxpayer must
pay more than 1/2 the cost of maintaining a household, and must be the principal home of the dependent(except for school and hosptiatlization)
Must live in the taxpayers household for over 1/2 the year
Must satisfy either the qualifying child or qualifying relative category (the qualifying relative MUST meet the relationship test)
For head of household purposes, a QR must meet
the relationship test
HOH may still be claimed if the taxpayer maintains a separate home for his or her ____ if ___
parent or parents, at least one parent qualifies as a dependent of the taxpayer
HOH is/is not changed by the death of the dependent as long as
is not; the taxpayer provided more than half of the cost of maintaining the household prior to the dependents death
The abandoned spouse rules allow a married taxpayer to file as a ___ if the following conditions are met
the taxpayer does not file a joint return
the taxpayer paid more than 1/2 the cost of maintaining his or her own home for the tax year
the taxpayers spouse did not live in the home during the last six months of the tax year
the home was the principal residenc of the taxpayers son, steps, foster, or adopted child AND can be claimed as a dependent
THe a concept of realized gain or loss is calculated
amount realized from sale-adjusted basis of the property=realized gain(or loss)
The amount of realized from the sale
selling price-any costs of disposal
the adjusted basis of the property is determined by
cost at acquisition+captial additions-depriciation and other captial recoveries=adjusted basis
__% of realized gains are recognized, __% of ralized losses are recognized for tax purposes
all; some- generally losses realized from the disposition of personal use property are NOT recognized
The principal capital assets held for personal (rather than business) use such as
personal residence or an automobile and assets held for investment purposes
capital assets include
collectibles such as art, antiques, gems metals stamps and some coins and bullion and alcohol held for investment
short term gains are taxed at
(net captial gains)
long term gains are taxed at
Certain depricable property used in trade or business___
All other long term captial gains
(net capital gains)
15%or5%(regular tax bracket 15% or less)
In order to arrive at a net captial gains, captial losses must be taken into account, the captial losses are ___ and appliede against the gains in that category. if there are excess losses in that category then they are __ a net capital gain will occur i
aggregated by holding period (short term and long term; shifted to category carying the HIGHEST tax rate.
For individual taxpayers
net capital loss can be used to offset ordinary income of up to___
3000 (1500 for married filing separtate returns)
If a taxpayer has both ST and LT capital losses, the ST category is used first to arrive at the $3000, and any remaining capital loss is__ and retains__
carried over indefinatly until exhausted and retains its classification as short or long term
A married person can be claimed as a dependent only if
that individual does not file a joint return with his or her spouse
the support of ta qualifiying child is relevant only if
the child is self supporting
to be claimed as a dependent the QR's taxable income has to be less than
Several ways to reduce tax burden on unearned income of children under 14
assets that defer taxable income until after the child reaches age 14
growth stocks that pay little dividends
emplying children in parent's business

Deck Info