Insurance and Tax Planning All Modules

All terms and practice questions

16th Amendment

Amendment to the U.S. Constitution adopted on February 25, 1913, that gave Congress the power to lay and collect taxes on income.

Accuracy-Related Penalty

A penalty of 20 percent of the underpayment amount imposed on taxpayers who file a transaction for tax purposes.

Determination Letter

A letter issued by a district director of the IRS advising a taxpayer on how to report a transaction for tax purposes.

Discriminant Inventory Function System

A computer program used by the IRS to identify tax returns for audit.

Failure-to-File Penalty

A penalty of five percent of the unpaid tax balance for each month or part thereof that a tax return is late; subject to a minimum penalty of $450 (in 2022) or 100% of the tax due if more than 60 days late.

Failure-to-Pay Penalty

A penalty of 0.5 percent per month or part thereof that a taxpayer fails to pay tax that is owed.

Final Regulations

Regulations issued by the Treasury that have been adopted formally after compliance with the requirements of the Administrative Procedures Act.

Fraud

Implies that the taxpayer intentionally disregarded tax rules or misstated information included on the return.

Interpretative Regulations

Official interpretations of the Internal Revenue Code by the Treasury.

Legislative Regulations

Regulations in which the Treasury determines the details of the law.

Private Letter Ruling

Rulings issued by the IRS that are binding on the IRS only with respect to the transaction and the taxpayer that are the subject of the ruling.

Procedural Regulations

Housekeeping instructions indicating how the Treasury and IRS will conduct their affairs.

Proposed Regulations

Regulations that have been drafted by the Treasury but have not yet been adopted.

Revenue Procedures

Statements issued by the IRS which detail internal practices and procedures within the IRS and make important announcements to taxpayers.

Revenue Rulings

Rulings issued by the IRS based on a set of facts common to many taxpayers and binding on the IRS.

Statute of Limitations

Specified time within which the IRS may examine on income tax return.

Substantial Omission

An omission from a tax return of more than 25 percent of the gross income reported.

Temporary Regulations

Regulations that have the same authority as final regulations and are issued when guidance must be provided quickly to taxpayers.

Treasury Regulations

Regulations that are official interpretations of the Internal Revenue Code and give taxpayers insight as to how the Code will be enforced by the IRS.

U.S. Court of Federal Claims

Court that may preside over tax controversies and only hears cases in Washington, D.C.

U.S. District Court

Trail court of the federal judicial system which has general jurisdiction and is the only option for tax controversies in which the taxpayer would like a jury trial.

U.S. Tax Court

A special purpose court that sits in Washington, D.C. and only hears tax cases. The judges within the court travel throughout the U.S. to hear the cases.

What are the three primary sources of tax law?

1. Statutory Sources (Laws passed by Congress, mainly the Internal Revenue Service Code (IRC).

2. Administrative Sources (IRS and Treasury guidance: Regulations, Revenues Rulings, Revenue Procedures, etc.

3. Judicial Sources (Court decisions interpreting tax law (Tax Court, District Courts, Supreme Court).

What is the legal basis for today’s income tax?

16th Amendment: Gives Congress the power to tax income from any source.

Internal Revenue Code (IRC): Is the federal law Congress uses to create and enforce income tax rules.

What are the statutory sources of tax law?

The Internal Revenue Code (IRC)

• The only statutory source of federal tax law.

• Passed by Congress

What are the administrative sources of tax law?

Administrative sources come from the IRS and Treasury. They include:

• Treasury Regulations

• Revenue Rulings

• Revenue Procedures

• Private Letter Rulings & Determination Letters

• IRS Notices and Announcements

Compare and contrast proposed regulations, temporary regulations, and final regulations.

1. Proposed Regulations

• Not binding

• IRS’s draft ideas

2. Temporary Regulations

• Binding right away

• Same authority as final (but expire)

3. Final Regulations

• Permanent

• Highest authority

What is the difference between a procedural regulation and an interpretive regulation?

1. Interpretive Regulations

• Explain what the tax law means

• Interpret the Internal Revenue Code

• Higher authority than procedural rules

2. Procedural Regulations

• Explain how to follow IRS procedures

• Cover filing, deadlines, elections, paperwork

• Lower authority than interpretive rules

Discuss the two types of rulings issued by the IRS.

1. Revenue Rulings

• Apply to everyone

• IRS explains how the law applies to a general situation

• Guidance you can rely on, but not as strong as regulations

2. Private Letter Rulings (PLRs)

• Apply to one specific taxpayer

• Issued when a taxpayer asks how the IRS will treat their transaction

• Not precedent for others

When can a determination letter be issued?

When:

• A taxpayer requests it, and

• The issue involves a completed set of facts, and

• It is a topic the IRS allows district offices to rule on (like retirement plans or tax-exempt status).

It applies only to that specific taxpayer and situation

What is the general statute of limitations before which the IRS may examine a tax return?

The IRS has 3 years from the later of:

• the date the return was filed, or

• the return’s due date,

to examine (audit) a tax return.

Under what circumstances is the statute of limitations extended?

The normal 3-year statute is extended when:

1. Substantial Omission of Income

• Taxpayer leaves out more than 25% of gross income→ 6 years

2. Unreported Foreign Income/Assets

• Certain foreign accounts or income not reported → 6 years

3. Fraud or Intentional Evasion

• Fraudulent return → No time limit

4. No Return Filed

• IRS can assess tax at any time

5. Taxpayer Agrees to Extend

• Taxpayer signs a form giving the IRS more time

What are the penalties for noncompliance?

1. Failure-to-File Penalty

• For filing late

• Biggest penalty

2. Failure-to-Pay Penalty

• For paying late

• Smaller that failure-to-file

3. Accuracy-Related Penalty

• For negligence or major understatement

• Usually, 20% of underpaid tax

4. Fraud Penalty

• For intentional tax evasion

• 75% of underpaid tax

5. Other Penalties

• Missing information returns

• Payroll tax deposit failures

• Preparer penalties

What are the two forms of dispute resolution with the IRS?

1. Administrative Appeals

• Handled by the IRS Office of Appeal

• Goal: settle disputes without going to court

• Less formal, cheaper, and most cases end here

2. Judicial Review

• Taking the case to court (Tax Court, District Court, or Court of Federal Claims)

• Used when no agreement is reached with Appeals

• Results in a legally binding decision

What are the 3 trail courts that may hear tax-related matters and what are the requirements of each?

1. U.S. Tax Court

• Pay First? NO

• Requirement: Must have a Notice of Deficiency (90-day letter)

2. U.S. District Court

• Pay First? YES

• Requirement: Must pay the tax, file a refund claim, then sue

3. U.S. Court of Federal Claims

• Pay First? YES

• Requirement: Must pay the tax and file a refund suit

Above-the-Line Deductions

Deductions for adjusted gross income, also known as adjustments to income.

Accrual Method

An accounting method under which income is reported when it is earned rather than when it is received in cash, and expenses are reported when they are incurred rather than when they are paid.

Adjusted Gross Income

Gross income less above-the-line deductions.

Below-the-Line Deductions

Deductions from adjusted gross income. Also known as itemized deductions.

Cash Receipts and Disbursements Method

An accounting method under which income items are reported for the tax year in which they are received in cash and expenses are deducted in the year in which they are paid with cash.

Deductions

Items that are subtracted from gross income, either below-the-line or above-the-line, in order to arrive at taxable income.

Dependency exemption

A deduction from adjusted gross income allowed for each person who is a qualifying child or relative of the taxpayer for tax years before 2018 and after 2025.

Doctrine of Constructive Receipt

A cash method taxpayer must report income when it is credited to the taxpayer’s account or when it is made available without restriction.

Effective Tax Rate

A taxpayer’s effective (or average) tax rate is the average rate of tax paid, factoring in the payments at various marginal brackets.

Estimated Tax Payments

Quarterly payments that are paid to the IRS and may be claimed as a credit against tax.

Exclusions

Income items that are specifically exempted from income tax.

Gross Income

All income from whatever source derived unless it is specifically excluded by some provision of the internal Revenue Code.

Head of Household Filing Status

A filing status that provides a basic standard deduction and tax bracket sizes that are less favorable to the taxpayer than those for the surviving spouse status, but more favorable than those for the single filing status.

Hybrid Method

An accounting method, other than the accrual or cash receipts and disbursements methods, that is permitted by the IRC and the regulations as long as it is deemed to clearly reflect income.

Income

Broadly defined as the total amount of money, property, services, or other accretion to wealth received, but it does not include borrowed money or a return of invested dollars.

Kiddie Tax

A tax on the net unearned income of a child at the parent's highest marginal income tax rate.

Marginal Tax Rate

The highest tax bracket in which the taxpayer falls. This is the rate that will apply to the next dollar of income earned.

Marginal Filing Jointly Filing Status

A filing status that allows married couples to combine their gross incomes and deductions.

Married Filing Separately Filing Status

A filing status used when married couple do not choose to file a joint return.

Net Unearned Income (NUI)

The amount of unearned income of a child that is subject to tax at the parent’s marginal tax rate.

Original Issue Discount (OID) Bond

A bond that is issued for a price that is less than its face amount or principal amount on which interest is usually paid only at maturity.

Personal Exemption

A deduction from adjusted gross income for the taxpayer and the taxpayers spouse for tax years before 2018 and after 2025.

Phantom Income

Income imputed to taxpayers without a corresponding receipt of cash

Qualifying Child

A person who meets the relationship test, abode test, age test, support test, joint return test, and citizenship test, and may be claimed as a dependent of the taxpayer.

Qualifying Relative

A person who meets the relationship test, gross income test, support test, joint return test, and citizenship test; is not a qualifying child of any other taxpayer; and may be claimed as a dependent by the taxpayer.

Single Filing Status

A filing status used by an unmarried taxpayer who does not qualify as a surviving spouse or head of household.

Standard Deduction

A standard amount that is specified by Congress and includes inflation adjustments. Taxpayers may deduct the greater of the standard deduction or allowable itemized deductions.

Surviving Spouse Filing Status

A filing status for a surviving spouse with a qualifying child that affords the same basic standard deduction and tax rates as the married filing jointly status.

Tax credit

An amount that reduces the calculated tax liability of the taxpayer.

Tax Year

Normally a period of 12 months

Taxable Income

Determined by subtracting allowable deductions from gross income

Zero Coupon Bond

A bond that is sold at a deep discount, pays no coupons (or periodic interest payments), and matures at its face value.

How is income defined?

Any undeniable increase in wealth, clearly realized, and under the taxpayer’s control.

What are exclusions and where do they come from?

items of income that are NOT included in gross income because the tax law specifically says they’re tax-free. The come from:

1. The Internal Revenue Code (Primary Source)

2. Treasury Regulations (explain how exclusions work)

3. Court Decisions (interpret exclusion rules)

Define Gross Income

All income from whatever source derived, unless the tax law excludes it.

List some examples of items that would be included in gross income.

• Wages

• Interest & Dividends

• Business/rental income

• Capital gains

• Prizes & gambling winnings

• Taxable benefits

What are the two types of deductions?

1. Above-the-Line (For AGI)

• Reduce AGI; available to all taxpayers

2. Below-the-Line (From AGI)

• Either standard deduction or itemized deductions.

What is the adjusted gross income and what is its significance?

Gross income minus above-the-line deductions. It controls eligibility for many deductions and credits.

How much can an individual deduct from AGI?

• The Standard Deviation

• Itemized Deductions

Whichever is larger.

Under what circumstances may a taxpayer be entitled to an additional standard deduction?

If they are:

• Age 65 or older

• Blind

• or Both

Under what circumstances will a taxpayer be required to itemize deductions?

If:

• Married Filing Separately and the other spouse itemizes

• They are a nonresident alien

• They file a short-year return due to a change in accounting period

What types of accounting periods are available to taxpayers?

1. Calendar Year

• January 1- December 31

2. Fiscal Year

• Any 12-month period ending on the last day of a month other than December

3. 52-53 Week Year

• A year that always ends on the same day of the week each year (e.g., last Friday of June

What is the cash receipts and disbursements method of accounting?

Income is reported when it is actually or constructively received. Expenses are deducted when they are actually paid.

What is the accrual method of accounting?

Reports income when it is earned and deducts expenses when they are incurred, no matter when cash is actually received or paid.

What is the all events test?

• Income: Right to receive it is fixed + amount is known

• Expenses: Liability is fixed + amount known + economic performance

What are the different filing statuses available to taxpayers?

1. Single

2. Married Filling Jointly

3. Married Filing Separately

4. Head of Household

5. Qualifying Surviving Spouse (also called Qualifying Widow/er)

How is marital status determined for the purpose of selecting a filing status?

Whatever it is on December 31.

When is married taxpayer allowed to file using the head of household filing status?

Only when “considered unmarried”:

• Lived apart from spouse for the last 6 months

• Have a qualifying child

• Pay over half the cost of the home

• File a separate return

What are the requirements to file as a surviving spouse?

If:

• Their spouse died in one of the two prior tax years

• They have not remarried

• They have a dependent child who lived with them all year

• They pay more than half the cost of maintaining the home

For whom is a dependency exemption allowed?

1. A Qualifying Child

• (meets all the IRS tests: relationship, age, residency, support, joint return)

2. A Qualifying Relative

• (meets all the IRS tests: not a QC, relationship/household, gross income, support)

What tests must a qualifying child meet?

1. Relationship

2. Age

3. Residency

4. Support

5. Joint Return

What tests must a qualifying relative meet?

1. Not a Qualifying Child

2. Member of Household OR Relationship

3. Gross income below the limit

4. Taxpayer provides over half the support

How is the standard deduction calculated for someone who can be claimed as a dependent by another taxpayer?

the greater of:

• $1,350, or

• Earned income +450

But it can never be more than the basic standard deduction for their filing status.

What is the kiddie tax?

a special tax that applies to a child’s unearned income (like interest, dividends, and capital gains) over a set threshold, taxing that excess at the parent’s tax rate instead of the child’s.

Who must file a tax return?

If:

• Your income is above the filing threshold for your status

• You have $400+ of self-employment income

• You owe special taxes (like Social Security on tips)

• You’re a dependent with income above dependent limits

• You want a refund of withheld tax or refundable credits

Accrual Method

An accounting method under which income is reported when it is earned rather than when it is received in cash, and expenses are reported when they are incurred rather than when they are paid.

Alimony

A separate maintenance payment that is intended to replace income lost by one spouse as the result of a divorce and may be included in the gross income of the payee.

Annuitized

When regular periodic payments on an annuity contract begin for life or for a specified period of time in excess of one year.

Bartering

An exchange of property and/or services for other property and/or services

Cash Receipts and Disbursements Method

An accounting method under which income items are reported for the tax year in which they are received in cash and expenses are deducted in the year in which they are paid with cash.

Community Property

A regime in which married individuals own an equal, undivided interest in all the property accumulated, using either spouse’s earning, during the marriage.

Compensatory Damages

Monetary award intended to compensate for damage to property, for recovery of expenses incurred, for income lost, or for personal injury.

Coverdell Education Savings Account

Plan similar to a college saving plan that allows taxpayers to contribute up to 2,000 per beneficiary per year to an account.

Crypto Currency

A type of virtual currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.

Dividend Income

A distribution of corporate earnings to shareholders, usually in cash.