ACC 407 Chapter 3

What significant tax legislation was signed into law on July 4, 2025?

The One Big Beautiful Bill Act (OBBBA).

What is the basic formula for calculating income tax?

Gross Income - Deductions = Taxable Income.

What form is primarily used for individual income tax reporting?

Form 1040.

What is included in Gross Income according to §61(a)?

Income from 'whatever source derived,' including money, property, or services.

What is the structure of the Internal Revenue Code (IRC)?

The IRC is divided into titles, subtitles, chapters, subchapters, parts, sections, and subsections.

Which subtitle of the IRC deals with income taxes?

Subtitle A.

What does §62 of the IRC pertain to?

Deductions 'For' Adjusted Gross Income (AGI).

What are some examples of income included in Gross Income?

Wages, business income, gains from property sales, interest, rent, dividends, and unemployment benefits.

What are some exclusions from Gross Income?

Gifts, life insurance proceeds, certain scholarships, and tax-exempt interest.

What is the difference between deductions 'For' AGI and 'From' AGI?

Deductions 'For' AGI reduce gross income, while deductions 'From' AGI are taken after calculating AGI.

What is the basic standard deduction amount based on?

The filing status of the taxpayer.

What is the significance of realization in income recognition?

Realization must occur before income can be recognized for tax purposes.

What is the tax implication of borrowing money?

Borrowing does not create includible income for tax purposes.

What is the treatment of gains from the sale of property?

Gains are calculated as sales proceeds minus adjusted basis.

What is the tax basis in relation to total income?

Total income does not include a return of capital or tax basis of property sold.

What is AGI often referred to as? 11a/11b

'The Line' in tax calculations.

What are some common deductions 'From' AGI?

Itemized deductions or the standard deduction, whichever is greater.

What are the implications of the Transfer for Value Rule?

It affects the taxability of life insurance proceeds.

What is the significance of the year 2019 in relation to alimony payments?

Alimony agreements executed after 2019 are not deductible by the payer.

What is the purpose of Schedule 1 on Form 1040?

To report additional income and adjustments to income.

What does Schedule 2 on Form 1040 report?

Additional taxes.

What does Schedule 3 on Form 1040 report?

Additional credits and payments.

What is the tax treatment of interest from state and local bonds?

It is generally excluded from gross income.

What is the significance of the phrase 'economic benefit' in tax recognition?

Taxpayers recognize gross income when they receive an economic benefit.

What is the definition of 'includible income'?

Income that must be reported for tax purposes.

What is the standard deduction for taxpayers age 65 or older?

An additional standard deduction applies for taxpayers age 65 or older and/or legally blind.

What is the standard deduction limit for dependents?

The standard deduction is limited to the greater of $1,350 or earned income plus $450, not exceeding the basic standard deduction for their filing status.

What is the threshold for deducting medical expenses?

Medical expenses can only be deducted if they exceed 7.5% of AGI.

What is the maximum deduction for charitable contributions for nonitemizers under OBBBA?

Up to $1,000 for single filers and $2,000 for married taxpayers filing jointly.

Who qualifies for the no tax on tips deduction?

Workers in occupations that customarily receive tips, excluding specified businesses like CPAs and doctors.

What is the maximum deduction for overtime under OBBBA?

$12,500 for single filers and $25,000 for married filing jointly.

What is the maximum deduction for car loan interest under OBBBA?

$10,000 for buyers of new vehicles assembled in the U.S.

What is the enhanced deduction amount for seniors under OBBBA?

$6,000 per eligible taxpayer age 65 or older.

What are the two items that can reduce a taxpayer's amount owed to the government?

Prepayments of tax and tax credits.

What is the Child and Other Dependent Credit for children under 17?

$2,200 credit for each child under 17.

What is the filing status for legally married same-sex couples?

They are treated as married for Federal tax purposes regardless of where they live.

What is the filing status for a surviving spouse in the year of the spouse's death?

The surviving spouse can claim Married Filing Jointly (MFJ) status.

What is required for a taxpayer to qualify as Head of Household?

Must be unmarried, maintain a household for a dependent, and pay more than half the cost of maintaining that household.

What is the relationship test for a qualifying relative?

A qualifying relative must meet specific relationship criteria to be claimed as a dependent.

What is the maximum deduction for gambling losses?

Gambling losses can be deducted only to the extent of gambling income.

What is the income phaseout for the no tax on tips deduction?

Begins at $150,000 MAGI for single filers and $300,000 for married filing jointly.

What happens to the joint return filing status after filing jointly?

Spouses cannot switch to separate returns for the year in which a joint return has been filed.

What is the deduction limit for state and local taxes (SALT)?

Limited to $40,000 ($20,000 for married filing separately).

What is the requirement for the enhanced deduction for seniors?

Must be age 65 or older by the end of 2025 and have a valid SSN.

What is the credit reduction for the Child Tax Credit based on income?

Reduced by $50 for every $1,000 over $200,000 ($400,000 MFJ).

What is the filing status for a married couple who are both 65 or older?

They can claim a fixed deduction of $12,000.

What is the definition of a qualifying child for tax purposes?

A qualifying child must be a citizen or resident of the US and can be claimed as a dependent.

What is the requirement for a dependent to receive the Child Tax Credit?

Must have a Social Security Number (SSN).

What is the maximum deduction for the car loan interest deduction phaseout?

Begins at $100,000 MAGI for single filers and $200,000 for married filing jointly.

What must a taxpayer do to maintain Head of Household status?

Pay more than half the cost of maintaining a household that is the principal home of a dependent.

What is the head-of-household status for taxpayers?

Taxpayers can claim head-of-household status if they maintain a separate home for a dependent parent and provide more than half of the maintenance costs.

What qualifies a married taxpayer as an abandoned spouse?

A married taxpayer can file as head of household if they do not file jointly, pay more than half the cost of maintaining their home, and their spouse did not live in the home for the last six months of the tax year.

What is the Kiddie Tax?

The Kiddie Tax applies to children under 18 (or 24 in some cases) whose unearned income exceeds $2,700, taxing it at the parent's highest marginal tax rate to prevent income shifting.

What are capital assets according to §1221?

Capital assets are defined as property not held primarily for sale in the ordinary course of a trade or business, including stocks.

How are net capital gains and losses calculated?

Net capital gains and losses are calculated by netting short-term and long-term capital gains and losses separately, with net long-term capital gains taxed at lower rates than ordinary income.

What are the maximum capital gains tax rates?

Capital gains can be taxed at 0%, 15%, or 20%, with special rates of 25% for unrecaptured §1250 gain and 28% for collectibles.

Who must file a tax return?

A tax return must be filed if gross income equals or exceeds the applicable standard deduction for the taxpayer's filing status.

What exceptions exist for filing a tax return?

Exceptions include dependents with specific income thresholds, taxpayers owing additional Medicare tax, self-employed individuals with earnings over $400, and married filing separately with any income.

What methods are used to compute tax liability?

Tax liability can be computed using the Tax Table method for incomes below $100,000 or the Tax Rate Schedule method.

What is the difference between earned and unearned income?

Earned income includes salaries and wages, while unearned income includes interest, dividends, and capital gains.

When are individual tax returns due?

Individual tax returns (Form 1040) are due on April 15th.

What are the due dates for estimated tax payments?

Estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th of the following year.

What is the tax treatment for C Corporations?

C Corporations file Form 1120, pay tax on taxable income at 21%, and shareholders pay tax on dividends, leading to potential double taxation.

What are pass-through entities?

Pass-through entities include S Corporations and Partnerships that do not pay tax but report income, gain, loss, and deductions to owners via Schedule K-1.

What is the limit on charitable contribution deductions for corporations?

Corporations can deduct charitable contributions limited to 10% of taxable income before the deduction.

What happens to excess capital losses for corporations?

Corporations cannot deduct net capital losses, and excess losses cannot be carried forward.

What is the additional standard deduction for taxpayers aged 65 or older?

The additional standard deduction for being age 65 or older is considered in determining the gross income filing requirement.

What is the purpose of the Kiddie Tax?

The Kiddie Tax aims to prevent high-income parents from shifting income to their children to take advantage of lower tax rates.

What is the significance of the netting process for capital gains?

The netting process allows taxpayers to offset short-term and long-term capital gains and losses to determine taxable amounts.

What is the filing requirement for dependents with earned income?

Dependents must file if their earned income exceeds the total standard deduction.

What is the filing requirement for dependents with unearned income?

Dependents must file if their unearned income exceeds $1,350 plus any additional standard deduction.

What is the filing requirement for dependents with both earned and unearned income?

Dependents must file if their gross income exceeds the larger of $1,350 or the sum of earned income plus $450.

What happens if a tax return due date falls on a weekend or holiday?

If the due date falls on a weekend or national holiday, it is moved to the next business day.

What is the purpose of estimated tax payments?

Estimated tax payments are made to cover taxable income for which insufficient federal tax has been withheld.

What is broadly defined as income in the tax formula?

Any increase in wealth, including both taxable and nontaxable income.

What does gross income exclude?

Unrealized gains, such as stock that has appreciated in value but has not been sold.

What is adjusted gross income (AGI)?

An individual taxpayer's gross income less specific adjustments (deductions) identified in § 62(a).

Why is AGI important?

It is used to limit certain itemized deductions and is a starting point for determining state taxable income.

What are the two categories of deductions for individual taxpayers?

Deductions for adjusted gross income and deductions from adjusted gross income.

What are itemized deductions?

Personal expenditures allowed by the Code as deductions from adjusted gross income, reported on Schedule A of Form 1040.

What is the general rule regarding personal expenses as deductions?

Personal expenses are not permitted as deductions, with some exceptions allowed by tax law.

What is the floor for deducting medical expenses?

Medical expenses are deductible only to the extent they exceed 7.5 percent of AGI.

What is the ceiling for charitable contribution deductions?

Charitable contributions may not exceed 50 percent of AGI (60 percent for cash contributions to public charities).

What is the standard deduction?

An amount that individual taxpayers can claim instead of itemizing deductions, varying by filing status.

What is the basic standard deduction amount for single filers in 2026?

$16,100.

What additional standard deductions are available for elderly or blind taxpayers?

$1,650 for married taxpayers and $2,050 for single taxpayers.

What is the senior deduction?

A deduction up to $6,000 from AGI available to individuals age 65 or older, phasing down after certain income thresholds.

What is the deduction for qualified business income?

A deduction relating to business income generated by noncorporate businesses, limited to the lesser of 20 percent of qualified business income or modified taxable income.

What percentage of households claim itemized deductions after the TCJA?

Only about 10 percent of households.

What is the deduction for tip income starting in 2025?

Eligible taxpayers may deduct up to $25,000 related to tip income, with phase-out thresholds based on modified adjusted gross income.

What is the deduction for overtime pay starting in 2025?

Up to $12,500 for qualified overtime pay, with phase-out thresholds similar to the tip income deduction.

What is the deduction for vehicle loan interest starting in 2025?

Up to $10,000 for qualified vehicle loan interest, with specific eligibility criteria and phase-out thresholds.

What is the effect of the standard deduction on a taxpayer's income?

It exempts part of a taxpayer's income from Federal income tax liability.

How is the standard deduction amount determined?

It is the sum of the basic standard deduction and any additional standard deductions, adjusted for inflation each year.

What is the basic standard deduction for dependents in 2026?

Limited to the greater of $1,350 or the sum of the individual's earned income for the year plus $450.

What happens if a dependent's earned income plus $450 exceeds the basic standard deduction?

The basic standard deduction is used instead.

What additional deduction is allowed for dependents who are 65 or over or blind?

An additional standard deduction amount.

What has happened to personal and dependency exemptions in the tax system?

Both have been permanently repealed and are no longer deducted in calculating taxable income.

What are the two types of dependents under the Internal Revenue Code?

Qualifying child and qualifying relative.

What tests must a qualifying child meet?

Relationship, residence, age, support, joint return, and citizenship or residency tests.