Tax chapter 4

federal income tax

taxable income

the tax base for the income tax

after-tax return

after tax rate = before tax return * (1- marginal tax rate)

adjusted gross income (AGI)

gross income less deductions for AGI. AGI is an important reference point that is often used in other tax calculations (gross income - for AGI (above the line) deductions)

gross income

realized income minus excluded and deferred income (gross income = realized income - excluded and deferred income)

all inclusive income concept

a definition of income that says that gross income means all income from whatever source derived

realized income

income generated in a transaction with a second party in which there is a measurable change in property rights between parties

exclusions or excluded income

realized income that is exempt from income taxation

deferral items, deferred income, or deferrals

realize income that will be taxed as income in a subsequent year

character of income

a type of income that is treated differently for tax purposes from other types of income. common income characters (or types of income) include ordinary, capital and qualified divided

net capital gains

the excess of net long term capital gain for the taxable year over net short term capital loss for such year

deductions

amounts that are subtracted from gross income in calculating taxable income

legislative grace

the concept that taxpayers receive certain tax benefits only because congress writes laws that allow taxpayers to receive the tax benefits

for AGI deductions

deductions that are subtracted from gross income to determine AGI

from AGI deductions

deductions subtracted from AGI to calculate taxable income

deductions above the line

for AGI deductions or deductions subtracted from gross income to determine AGI

deductions below the line

from AGI deductions subtracted from AGI to calculate taxable income

itemized deductions

certain types of expenditures that congress allows taxpayers to deduct as from AGI deductions

standard deduction

a fixed deduction offered in lieu of itemized deductions. the amount of the standard deduction depends on the taxpayers filing status

tax table

IRS provided tables that specify the federal income tax liability for individuals with taxable income within a specific range. the tables differ by filing status and reflect tax rates that increase with taxable income

tax rate schedule

a schedule of progressive tax rates and the income ranges to which the rates apply that taxpayers may use to compute their gross tax liability

alternative minimum tax (AMT)

a tax on a broader tax base than the base for the “regular” tax; the additional tax paid when the tentative minimum tax (based on the alternative minimum tax base) exceeds the regular tax (based on the regular tax base). the alternative minimum tax is designed to require taxpayers to pay some minimum level of tax even when they have low or no regular taxable income as a result of certain tax breaks in the tax code.

tax credits

items that directly reduce a taxpayers tax liability

withholdings

taxes collected and remitted to the government by an employer from an employees wages

estimated tax payments

quarterly tax payments that a taxpayer makes to the government if the tax withholding is insufficient to meet the taxpayer’s tax liability

qualifying child

an individual who qualifies as a dependent of a taxpayer by meeting a relationship, age, residence, and support test with respect to the taxpayer

qualifying relative

an individual who is not a qualifying child of another taxpayer and who meets a relationship, support, and gross income test and thus qualifies to be a dependent of another taxpayer

qualifying child requirements

1. relationship (child or descendent of a child , sibling or descendent of a sibling)

2. age (younger than taxpayer and either under 19 or under 24 and a full time student (for at least 5 months) at the end of the year or permanently disabled)

3. residence (shared residence for more than half of the year)

   1. support (couldn’t provide more than half of their own support for the year including but not limited to: food, education, clothing, medical and dental care etc)

qualifying child tiebreaking rules

1. parent is entitled to claim dependent over nonparents

2. the parent who had the child the most throughout the year would claim over the other parent. if both parents had the child for equal time then the parent with the higher AGI gets to claim them

   1. if there are multiple nonparents the nonparent with the highest AGI would be able to claim them

qualifying relative requirements

1. relationship (a descendent or ancestor, a sibling, a son or daughter of a sibling, an aunt or uncle, an in law of the taxpayer, OR if the person and the taxpayer share a household for the entire year)

2. support (they paid over half of the individuals support or not one taxpayer paid over half of the individuals support, the taxpayer contributed over 10% of the individuals support for the year ect ect idk)

3. gross income (the qualifying relative gross income for the year is less than $5,300)

difference between qualifying child and qualifying relative requirements

1. the relationship is more broad for qualifying relatives

2. qualifying children are subject to age restrictions while qualifying relatives aren’t

3. qualifying relatives are subject to income restrictions while qualifying children are not

4. taxpayers don’t need to provide more than half of the qualifying child’s support (as long as the child isn’t providing more than half of their own support) but they must provide more than half of the support for a qualifying relative

5. qualifying children are subject to a residence test (must have the same residence for more than half of the year) while qualifying relatives are not

filing status

filing status places taxpayers into one of five categories by marital status and family situation by the end of the year. filing status determines whether a taxpayer must file a tax return, appropriate tax rate schedules, standard deduction amounts, and certain deduction and credit limitation thresholds

filing statuses

1. married filing jointly

2. married filing separately

3. qualifying surviving spouse

4. single

5. head of household

married filing jointly

a taxpayer may file jointly if they are legally married as of the end of the year (or one spouse died during the year and the surviving spouse did not remarry) and both spouses agree to file jointly. married couples filing jointly combine their income and deductions and share joint and several liability for the resulting tax

married filing separately

when married couples file separately each spouse reports the income they received during the year and the deductions they paid on a tax return separate from the other spouse

abandoned spouse

a married taxpayer who lives apart from their spouse for the last six months of the year (excluding temporary absences) who files a tax return separate from their spouse and who maintains a household for a qualifying child

qualifying surviving spouse

applies for up to two years after the year in which the taxpayer’s spouse dies (the taxpayer files married filing jointly in the year of the spouses death) as long as the taxpayer remains unmarried and maintains head of household for a dependent child

single

a taxpayer files as single if they are unmarried as of the end of the year and does not qualify for any of the other filing statuses. a taxpayer is considered single if they are unmarried or legally separated from their spouse under a divorce or separate maintenance decree.

head of household

a taxpayer may file as head of household if they are unmarried as of the end of the year and pays more than half of the cost to maintain a household for a qualifying person who lives with the taxpayer for more than half of the year; or they pay more than half the costs to maintain a household for a parent who qualifies as the taxpayer’s dependent

individual income tax formula

1. gross income - adjustments (for AGI deductions “above the line”) = adjusted gross income (AGI)

2. Adjusted gross income (AGI) - deductions (from AGI deductions “below the line”) = taxable income

3. taxable income * tax rate (%) = income tax liability

4. tax liability + other taxes = total tax

   1. total tax - credits - prepayments/ withholding = taxes due or refund amount

AGI to taxable income sequence

gross income —> adjustments (for AGI deductions “above the line”) —> Adjusted gross income (AGI) —> deductions (from AGI deductions “below the line”) —> taxable income