Taxation topic 2

what is the goal of basic tax planning?

reduce tax by timing, income shifting and tax character strategies

what does present value of money mean?

money now is worth more than future money. early tax savings are better

what are timing strategies?

shifting income or expenses to a different tax year to minimize taxes

what limits timing strategires?

you must have control over timing, tax rules prevent abuse

what are income shifting strategies?

moving income to lower tax individuals or locations

what is the difference between tax avoidance and tax evasion?

Tax avoidance is legal, tax evasion is illegal

what is gross income?

all income received unless excluded by law

what are exclusions?

income not counted in gross income, gifts, inheritance

what is deferral?

income recognized and taxed in a future year

name three common exclusions

life insurance proceeds, scholarships for tuition, employer health insurance benefits

what are the three types of income character?

ordinary income, capital gains/losses, qualified dividends

what is a capital asset?

investments like stocks, bonds or personal use property (not for business)

examples of capital assets?

stocks, personal real estate (non rental), collectibles, artwork

whats the difference between long-term and short-term capital assets?

long term is held over a year with shorter tax rates, short term is 1 year or less and is taxed as ordinary income

What are capital losses used for?

offset capital gains, up to 3,000 a year to reduce ordinary income

list common income items included in gross income

wages, business income, interest, dividends, rental income, retirement distributions

what are above the line deductions for AGI

deductions taken BEFORE AGI is calculated, such as student loan interest

what are below the line deductions from AGI

deductions taken after AGI, such as itemized or standard deduction

what are itemized deductions

medical expenses, mortgage interest, charitable donations

how is taxable income calculated?

gross income - exclusions - deductions = taxable income

what happens after calculating taxable income?

Apply tax rates, subtract credits, account for prepayments

what is a tax credit

direct reduction of tax owed

what is a nonrefundable credit

reduces tax to zero, excess lost

what is a partially refundable credit

some portion refundable beyond tax liability

what was special about tax credits in 2021

temporary fully refundable pandemic credits

what are tax prepayments?

withholding from paychecks, extimated tax payments

who qualifies as a dependent?

meets relationship, residency, and support tests, may allow extra credits

what is realization of income?

income earned or received

what is recognition of income?

income reported for tax purposes

does the form of receipt matter for taxes?

no, all income is taxable regardless of form (cash, property, services)

what is constructive receipt?

income taxable when made available, even if not in hand

who recognizes income?

person earning or receiving the income

what are examples of earned income?

wages, salaries

what are examples of unearned income

interest, dividends, capital gains

what are other income sources

rental income, royalties, bartering

why are some exclusions allowed

to prevent double taxation or encourage certain activities