Lesson 1: Fundamentals of Income Taxation
1. Basic Tax Formula: Income - Deductions = Taxable Income x Tax Rate
= Tax Liability
2. A single taxpayer with income of $30,000 and deductions of $10,000 has
taxable income of: $20,000 ($30,000 - $10,000 = $20,000).
If we assumed a flat tax rate of 12%, the income tax liability for this taxpayer would
be $2,400 (12% x $20,000).
3. a _________________- is in place that assesses taxable income at higher
rates as taxable income levels increase and in accordance with filing
status.: progressive tax system
4. expanded federal income tax formula:
5. Items included in gross income: Compensation for services (including fringe
benefits
Income from life insurance and endowment contracts
Income derived from business
Pensions
Gains derived from dealings in property
Discharge of indebtedness
Interest and dividends
Distributive share of partnership gross income
Rents and royalties
Income in respect of a decedent
Alimony and separate maintenance payments required by a divorce decree entered
into before December 31, 2018 (unless substantially modified after December 31,
2018)
Income from an interest in an estate or trust
Annuity payments
6. Items Excluded from Gross Income: Interest income from municipal bonds
Cash or property received by a gift
, Lesson 1: Fundamentals of Income Taxation
Child support payments received from a former spouse
Deferral contributions to certain retirement plans
Cash or property received by inheritance
Gain on the sale of a principal residence (subject to limitations)
Specified employee fringe benefits
Scholarship or fellowship
Qualifying distributions from a Roth IRA during retirement
Life insurance proceeds received because of the death of the insured
Interest income from municipal bonds
Cash or property received by a gift
Alimony from post 2018 divorce (TCJA)
7. Which of the following is not excluded from gross income?
Gifts
Scholarships
Dividend Income
Interest Income from Municipal Bonds: Dividend income is specifically included
in gross income. All of the other items are specifically excluded from gross
income. 8. why is AGI one of the most important items that effective tax
planning revolves around: AGI is used to determine limitations on deductions
and credits, as well as the phase-outs of certain tax benefits.
For most states, it is also used as the starting point for determining taxable income
so most tax planning strategies involve trying to get this figure as low as possible
in order to lower taxable income both directly and indirectly through making certain
deductions and credits available.
9. Above the line deductions: adjustments subtracted from gross income
whether taxpayer itemizes deductions or not
10. deductions for AGI (above the line): these items change frequently
(changed alot w Trump tax law)
11. deductions from AGI (below the line): There are three different types of
deductions, the Standard Deduction
Itemized Deductions,
20% QBI Deduction (to be covered later).
, Lesson 1: Fundamentals of Income Taxation
Taxpayers can either choose to take the standard deduction or itemize their
deductions, whichever is greater.
12. The __________________ is a large lump sum amount that is calculated
to simplify the deduction process. _____________ are set at amounts that
would include things that would normally be itemized.: Standard Deduction
13. Standard Deductions are set at amounts that would include things that
would normally be itemized. Such as the following:: Medical Expenses
Interest
Taxes
Casualty Losses
Charitable Deductions
Miscellaneous Itemized Deductions
14. standard deduction filing status 2021 **need to memorize this, esp
married**:
15. There are a few cases in which additional standardized deduction
amounts apply to taxpayers who fall into the following categories.: Taxpayer
is over the age of 65
Taxpayer is blind.
It's important to note that these deductions only apply to the taxpayer and their
spouse, not to any dependents they may have. It is also important to note that if a
taxpayer is both over the age of 65 and blind, they qualify for two additional standard
deduction amounts as they are displayed in the table below.
16. Itemized deductions will be covered in greater detail in Lesson 4, but it
is important to note that it is only beneficial for a taxpayer to itemize if: their
itemized deductions exceed the standard deduction amount since this will
ultimately reduce their taxable income. However, there are a few cases in which
some taxpayers MUST itemize their deductions.
Case 1
An individual who files a tax return for less than 12 months because of a change in
the taxpayer's annual accounting period is not permitted to use the standard
deduction.
1. Basic Tax Formula: Income - Deductions = Taxable Income x Tax Rate
= Tax Liability
2. A single taxpayer with income of $30,000 and deductions of $10,000 has
taxable income of: $20,000 ($30,000 - $10,000 = $20,000).
If we assumed a flat tax rate of 12%, the income tax liability for this taxpayer would
be $2,400 (12% x $20,000).
3. a _________________- is in place that assesses taxable income at higher
rates as taxable income levels increase and in accordance with filing
status.: progressive tax system
4. expanded federal income tax formula:
5. Items included in gross income: Compensation for services (including fringe
benefits
Income from life insurance and endowment contracts
Income derived from business
Pensions
Gains derived from dealings in property
Discharge of indebtedness
Interest and dividends
Distributive share of partnership gross income
Rents and royalties
Income in respect of a decedent
Alimony and separate maintenance payments required by a divorce decree entered
into before December 31, 2018 (unless substantially modified after December 31,
2018)
Income from an interest in an estate or trust
Annuity payments
6. Items Excluded from Gross Income: Interest income from municipal bonds
Cash or property received by a gift
, Lesson 1: Fundamentals of Income Taxation
Child support payments received from a former spouse
Deferral contributions to certain retirement plans
Cash or property received by inheritance
Gain on the sale of a principal residence (subject to limitations)
Specified employee fringe benefits
Scholarship or fellowship
Qualifying distributions from a Roth IRA during retirement
Life insurance proceeds received because of the death of the insured
Interest income from municipal bonds
Cash or property received by a gift
Alimony from post 2018 divorce (TCJA)
7. Which of the following is not excluded from gross income?
Gifts
Scholarships
Dividend Income
Interest Income from Municipal Bonds: Dividend income is specifically included
in gross income. All of the other items are specifically excluded from gross
income. 8. why is AGI one of the most important items that effective tax
planning revolves around: AGI is used to determine limitations on deductions
and credits, as well as the phase-outs of certain tax benefits.
For most states, it is also used as the starting point for determining taxable income
so most tax planning strategies involve trying to get this figure as low as possible
in order to lower taxable income both directly and indirectly through making certain
deductions and credits available.
9. Above the line deductions: adjustments subtracted from gross income
whether taxpayer itemizes deductions or not
10. deductions for AGI (above the line): these items change frequently
(changed alot w Trump tax law)
11. deductions from AGI (below the line): There are three different types of
deductions, the Standard Deduction
Itemized Deductions,
20% QBI Deduction (to be covered later).
, Lesson 1: Fundamentals of Income Taxation
Taxpayers can either choose to take the standard deduction or itemize their
deductions, whichever is greater.
12. The __________________ is a large lump sum amount that is calculated
to simplify the deduction process. _____________ are set at amounts that
would include things that would normally be itemized.: Standard Deduction
13. Standard Deductions are set at amounts that would include things that
would normally be itemized. Such as the following:: Medical Expenses
Interest
Taxes
Casualty Losses
Charitable Deductions
Miscellaneous Itemized Deductions
14. standard deduction filing status 2021 **need to memorize this, esp
married**:
15. There are a few cases in which additional standardized deduction
amounts apply to taxpayers who fall into the following categories.: Taxpayer
is over the age of 65
Taxpayer is blind.
It's important to note that these deductions only apply to the taxpayer and their
spouse, not to any dependents they may have. It is also important to note that if a
taxpayer is both over the age of 65 and blind, they qualify for two additional standard
deduction amounts as they are displayed in the table below.
16. Itemized deductions will be covered in greater detail in Lesson 4, but it
is important to note that it is only beneficial for a taxpayer to itemize if: their
itemized deductions exceed the standard deduction amount since this will
ultimately reduce their taxable income. However, there are a few cases in which
some taxpayers MUST itemize their deductions.
Case 1
An individual who files a tax return for less than 12 months because of a change in
the taxpayer's annual accounting period is not permitted to use the standard
deduction.
