Exam 1 Cheat Sheet - Summary Tax Accounting 1 PDF

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Professor Stephanie Lewis- Exam 1 Concepts ...

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Internal Revenue Code (IRC)- Federal law, primary source of tax authority Internal Revenue Service IRS Enforce tax law  Collect taxes owed  Educate taxpayers Marginal tax rate- tax rate that applies to the next $ of income (tax bracket)  10%-29.6% Effective tax rate  Avg tax rate = tax liability/taxable income Progressive Tax Rate – Tax Rate incr as Tax Base incr Proportional Tax Rate – Tax Rate is constant i.e. Sales Tax Regressive Tax – Tax Rate decr as Tax Base incr i.e. Social Security Purpose of Tax 1) Revenue needs of the government 2) Economic considerations a. Control/manipulate the economy b. Encourage certain activities c. Special treatment for certain industries 3) Social considerations a. Incentives for lower income tax payers 4) Political considerations Tax Formula Income (Exclusions) Gross Income (Deductions for AGI) Adj Gross Income Greater of: (Itemized deductions ) or (Standard Deduction) (Personal exemption) (Dependency exemption) Taxable Income Tax on taxable income (tax credits) tax due/refund AGI Often required for state filings Used to calculate deduction ceiling (max) or floor (portion of expense that cannot be deducted) Exemption  Personal- yourself and spouse if filing jointly  Dependency exemption – qualifying child or qualifying relative  No maximum # of exemptions Standard Deduction vs. Itemized Deductions  Deduct the greater of the 2  

Qualifying Child: citizen or US resident 1. Joint Return Test: dependent cannot file a joint tax return with his/her spouse

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Relationship Test: Children, brothers/sisters (Must be younger), descendants of children/siblings 3. Abode Test: Must live w/ tax payer > half year (temporary absences excluded) 4. Age Test: under 19 yrs old, or under 24 if full-time student. Age test does not apply to disabled 5. Must not be self-supporting Qualifying Relative - Citizen or US resident - Joint return test- if a dependent is married, the supporting taxpayer is generally not permitted a dependency exemption - Relationship Test: can include same as QC rule, older brothers/sister, ascendants, OR member of household living w/ you for entire year. - Taxpayer must provide more than half of the support - Gross income test: dependent cannot have gross income greater than 4050 Support Test: Person claiming relative must provide 50% of relatives expenses Filing Status 1) Single- unmarried (determined last day of tax yr) 2) Married- filing joint 3) Married- filing separately a. Will never save lax liability b. Use if state/local tax savings > additional federal tax c. Liability reasons 4) Surviving Spouse a. If taxpayer has a child and spouse that died $12600 standard deduction 5) Head of Household a. Unmarried and maintain a household for a dependent b. Must be qualifying child or qualifying relative who meets the relationship test ( other than a member of the household test) Exceptions  Abandoned spouse  Parents who are qualifying relatives even if they do not live with you Additional standard deduction  Age- 65 years or older  Blind- taxpayer and spouse Limitations  Cannot take standard deduction of spouse itemizes deductions  Deduction is limited for taxpayers who are listed as a dependent Tax filing requirements  Form 1040 (1040-EZ, 1040A)  April 15th = due date o Auto extension = 6 mos  Must file if: o Self employment > $400 o Gross income > standard deduction

Income- recognized when realized. Unless and exception. Something new of value Cash Basis  Income is taxed when received or constructively received  Constructive receipt- 1) amount or property is readily available to taxpayer 2) no limitations on taxpayers use of income Accrual  Income is included in gross income, all events and amount is reasonably determined  Income received from goods/services, recognition the same as GAAP  Most prepaid income is taxable when received  Departure from GAAP: most prepaid income is taxable when received, prepaid service income in year of receipt, gross income includes what is received, balance is included in gross income in year following receipt Who is the taxpayer?  Income from services- service provider  Income from property- property owner  Community property- relevant for married taxpayers who file separately  Interest income-taxed to who earns o Proportion of interest Inclusions in Gross Income  Gains from sale of assets  Losses (if allowed) from sale of assets = reduction  Gross profit Alimony  Included in the gross income of the recipient  Deductions for AGI of the payer  Payment must be cash  Agreement or order must say that payments are alimony  Payments must cease upon death of recipient  Parties must live apart at time of payment Prizes & Awards  Generally included in gross income Exceptions  Scholarships- excluded from income up to tuition and fees  Certain employee achievement awards like length of service, you can exclude up to $400 (or $1600 if non-discriminatory)  Certain lifetime achievement awards o Recipient did not actively seek reward o Eligible institution o No future expectation of service Income Exclusions 1) Child Support 2) Scholarships 3) Some compensatory damages 4) Worker’s Comp 5) Municipal Bond interest 6) Stock dividends

7) Inheritance 8) Gifts 9) Life Insurance Proceeds 10) Social Security Payments 11) Accident/Health Insurance 12) Group Term Insurance Damages  Punitive- always taxable  Compensatory o Excluded if received due to personal injury/illness Group Term Life Insurance- employee can exclude value of coverage up to $50000 per year Phase Outs: - Exemptions (both personal and dependency) are phased out by 2% each $2500 by which the AGI exceeds the threshold, for married its $1250. 1. $4050 x # of exemptions = max exemption deduction 2. AGI – Threshold amt = excess amount 3. Excess amount / 2500 = Phase out percentage 4. Phase out percentage x 2 = new phase out percent 5. New Phase out percent x max exemption deduction = phase out 6. Max exemption deduction – phase out = FINAL ANSWER If dependent: Standard deduction is EARNED income + 350 or 1050 whichever is greater Tax liability = use table Marginal Rate = % on the table Average Rate = Tax Liability / Taxable Income...