Income Tax Fundamentals and Calculations Exam 2022/2023 Solved 100% Correct

Income - ANSWER-Both taxable and non-taxable Includes income from any source Does not include "return of capital" Exclusion - ANSWER-A source of income that is omitted from the tax base Any item of income that tax law treats as nontaxable Major exclusions: gifts and inheritances, life insurance proceeds, welfare, certain scholarships and fellowships, certain payments for injury and sickness, certain employee fringe benefits, certain foreign-earned income, interest on state and local government bonds, certain interest of Series EE bonds, certain improvements by lessee to lessor's property, child support payments, property settlements pursuant to a divorce, and gain from the sale of a personal residence Gross income - ANSWER-Everything of value received by a taxpayer during the taxable year unless it is established that it is not income Gross income items: compensation for services, gross income derived from dealings in property, gains derived from dealings in property, interest, rents, royalties, dividends, alimony and separate maintenance payments, annuities, income from life insurance and endowment contracts, pensions, income from the discharge of indebtedness, distributive share of partnership gross income, income in respect of decedent, income from an interest in an estate or trust Deductions for AGI - ANSWER-Allowable deductions include business expenses, investment expenses, or personal expenses that are specifically provided for in the IRC Generally deductions for AGI are expenses connected with trade or business Ex:) trade and business deductions, reimbursed employee expenses, losses from the sale or exchange of property, deductions attributable to rents and royalties, certain deductions of life tenants and income beneficiaries of property, contributions to retirement plans, penalties forfeited because of premature withdrawal of funds from time savings accounts, 1/2 of self-employment taxes paid, portion of health insurance costs incurred by a self-employment person, alimony, moving expenses, certain required payments of supplemental unemployment compensation, jury duty pay remitted to an individual's employer, certain environmental expenditures, interest on education loans and, contributions to medical savings account and HSAs More valuable-- deductions include trade or business expenses, expenses relating to property held for the production of income (rental property) alimony, IRA contributions, net capital losses, and certain others Deductions from AGI - ANSWER-Include any allowable deduction under itemized deductions or standard deduction, and personal and dependency exemptions Itemized deductions - ANSWER-Taxpayers are allowed to itemize expenses related to: 1) The production or collection of income 2) The management of property held for the production of income, and 3) The determination, collection, or refund of any tax Claimed only if the total of such expenses exceeds the standard deduction Standard deduction - ANSWER-Amount varies depending on the taxpayer's filing status, age, and vision/eyesight For most taxpayers, the standard deduction is greater than the total itemized deductions Single: $6300 Married filing jointly: $12600 Married filing separately: $6300 Heads of household: $9250 Married taxpayer's standard deduction is increased by $1250 if he/she is elderly or blind If unmarried his/her deduction increased by $1550 Personal and dependency exemptions - ANSWER-Personal exemption is allowed for each taxpayer and his/her spouse Additional exemption is permitted for each dependent Amount is adjusted annually for increase in the cost of living-- $4050 in 2016 Taxable income - ANSWER-AGI reduced by deductions from AGI The amount of income that is taxed Tax rates - ANSWER-Currently 7 individual income tax rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% Credits and prepayments - ANSWER-Amounts that can be subtracted from the gross tax to arrive at the net tax due or refund due Refundable tax credits—are allowed to reduce a taxpayer's tax liability to 0 and if some credit still remains are refundable (paid) by the government to the taxpayer Prepayments of tax, which are amounts paid to the government during the year through which means such as withholding from wages and selected other items are also classified as refundable tax credits Nonrefundable tax credits—allowances that have been created by Congress for various social, economic, and political reasons such as the child and dependent care credit They can be subtracted from the tax and may reduce the tax liability to 0 If the nonrefundable credits exceed the tax liability, none of the excess will be paid to the taxpayer List of itemized deductions - ANSWER-Medical expenses-- over 10% of AGI State, local, and foreign income and real property taxes State and local personal property taxes