Week 1 Discussion
Topic 1:
Major tax reform that affects both individuals and businesses was enacted in December 2017. Its commonly referred to as the Tax Cuts and Jobs Act, TCJA or tax reform. Based on readings in your textbook and an article from the KU library, describe the tax history and main objectives of the U.S. tax law. Analyze one of the provisions from the TCJA and explain how it differs from pre-TCJA tax law. Do you believe this change in tax law does a better job of meeting the intended overall objective of U.S. tax law? Do not forget to note your source and in-text citation in APA format.
Do not forget to make your posts to the other topic this week.
Topic 2:
You are a CPA paid to prepare tax returns for various clients. One of your newest clients is a blended family. Both adults are separated and each claims Head of household filing status. Each taxpayer also claims a different child for the HOH status. All individuals in this family use the same address. Discuss how you would handle this situation. Be sure to support your comments with information you find in the KU library and/or in the IRS code.
Do not forget to make your posts to the other topic this week.
Requirements:
Class discussions and participation are required as part of your learning experience. These discussions are designed to have you participate in the learning process and enhance your understanding of the course material by interacting with the instructor and other students. Using proper business English, post your answers/opinions using at least 1 resource from the KU library(link above)for each topic given and comment on your classmates’ posts. Make sure you have noted your source in proper APA format.
Participation Requirements:The minimum number of posts this week isa total of 3 substantive (4-5 sentences each)posts for the week on3 different days. Initial posts to each topic given are due no later than Wednesday. You must post to each initial topic and for your 3rd required post you may post to either topic given.
Fundamentals of Taxation
2020 Edition
Cruz, Deschamps, Niswander, Prendergast, Schisler
Chapter 1
Introduction to Taxation, the Income Tax Formula, and Form 1040
2020 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
1
Introduction
An income tax was first enacted in 18 61 and repealed after the Civil War ended.
An income tax law was passed in 18 94 and was rejected by the Supreme Court in 18 95.
Sixteenth Amendment to the Constitution was passed in 19 13.
This is the basis of modern income tax law.
Over 153 million individual income tax returns were filed in 2017 (most recent year available).
Almost 136 million (89%) were filed electronically.
Individual income tax collections were about $1.59 trillion in 2017.
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The first income tax was enacted almost 150 years ago. It was not until a constitutional amendment was enacted in 1913 that the individual income tax became a reality. Much of the Internal Revenue Code has its legal foundation in the 16th Amendment.
Electronic filing has now grown to 89% of all tax returns.
Tax collections from individuals make up the largest part of total tax collections.
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Learning Objective #1: Progressive, Proportional, and Regressive Tax Structures 1
Taxes are levied by multiplying a tax rate (the rate of tax) by a tax base (the amount taxed).
May be multiple rates on multiple bases (see Table 1-2 for married taxpayers).
Progressive tax structure:
The tax rate increases as the tax base increases.
Example is the U.S. income tax system.
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Most taxes are calculated by multiplying a tax rate against a tax base.
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Learning Objective #1: Progressive, Proportional, and Regressive Tax Structures 2
Proportional tax structure:
The tax rate remains the same regardless of the tax base.
Example is state or local sales taxes.
Regressive tax structure:
The tax rate decreases as the tax base increases.
Example is social security tax system.
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One tax rate structure is a progressive tax structure where the rate increases as the base increases. The notion is that those with more can pay more. Our income tax system is based on this idea.
Another structure is the proportional structure where the rate remains constant at all levels of tax base. Sales taxes are such a type.
A regressive rate structure is one in which the rate goes down as income goes up. It is regressive because those with less income pay proportionally more.
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Learning Objective #1: Progressive, Proportional, and Regressive Tax Structures Concept Check 1-1
The three types of tax rate structures are
Progressive, proportional, and regressive
The tax rate structure for which the tax rate remains the same for all levels of the tax base is the
rate structure.
Proportional
The federal income tax system is an example of a
tax structure.
Progressive
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Learning Objective #2: Marginal and Average Tax Rates
Average tax rate is the total tax paid on a certain amount of taxable income
Total tax / taxable income = average tax rate.
Marginal tax rates are the rate of tax that will be paid on the next dollar of income.
Determined with reference to tax rate schedule.
For example, a married couple will pay a marginal rate of 22% on their $78,951st dollar of income.
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It is important to clearly understand the difference between an average tax rate and a marginal tax rate. They are seldom the same.
An average rate represents the arithmetic average. It is the total tax divided by the total taxable income. Some income may be taxed at a higher or lower rate, but this calculation determines the average over all the income. As tax rate changes or income changes, the average will change.
The marginal rate is the rate that will be paid on the next dollar of income. Refer to Table 1-2. Because of our tax bracket system, the marginal rate stays constant and then makes a jump. For example, a married couple with taxable income of $90,000 has a marginal rate of 22%. If they earn $90,001 they will pay 22 cents on that additional dollar. The marginal rate is also 22% for the next dollar, and the next dollar, and the next dollar. In fact, the marginal rate remains the same until they get to $168,401. At that point, the very last dollar is taxed at 24%.
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Learning Objective #2: The Income Tax Formula
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This is the basic income tax formula. All individual income tax returns are based on this formula. As the complexity of the tax situation of an individual increases, this formula becomes more complicated, but the basic structure remains the same. We will show you a more complex formula in chapter 2.
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Learning Objective #2: The Income Tax Formula Concept Check 1-2 1
The marginal tax rate is the rate of tax imposed on the next dollar of taxable income. True or false?
True
What is the marginal tax rate for a married couple with taxable income of $97,350?
22%
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Learning Objective #2: The Income Tax Formula Concept Check 1-2 2
Average tax rate and marginal tax rate mean the same thing. True or false?
False
Complex tax returns do not follow the basic (or simplified) income tax formula. True or false?
False
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Learning Objective #3: Components of Form 1040 1
Taxpayers annually file a tax return using
Form 1040.
Plus: zero to three of Schedules 1-3. Some taxpayers will not use any schedules, some will use three, and others will use something in between.
The forms and schedules all follow the basic income tax formula.
One or more schedules are used as the tax return becomes more complex.
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There is one tax forms on which a taxpayer can report their income and deductions to the Internal Revenue Service Form 1040. There are also three schedules that apply to a Form 1040. Taxpayers will use between zero and three of the schedules, depending on the complexity of their tax return.
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Learning Objective #3: Components of Form 1040 2
Wages include salaries, tips, commissions, bonuses, severance pay, sick pay, meals and lodging, fringe benefits, etc.
Employees receive a Form W-2 indicating total wage income in box 1.
Interest income is taxable unless specifically exempt.
Interest income reported on Form 1099-INT.
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The first item on a Form 1040 is wages. Wages include salaries, tips, and other items. Taxpayers receive a Form W-2 from their employer at the end of the year. This document lists the amount of wages received as well as other items, such as income tax withholdings, that will enable the taxpayer to file their tax return.
Interest income is another item that must be reported on an income tax return.
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Learning Objective #3: Components of Form 1040 3
Unemployment compensation is taxable.
Reported on Form 1099-G.
The Standard Deduction is shown on line 9.
$12,200 for single, $24,400 for married.
Total income minus permitted deductions equals Taxable Income (line 11b).
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Unemployment compensation is, in effect, a payment in lieu of wages. It is included as income on a tax return.
Taxpayers are allowed a deduction on line 9 of a Form 1040.
Taxable income (line 11b) is the total of all income minus the deduction from line 9.
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Learning Objective #3: Components of Form 1040 Concept Check 1-3
Only certain types of income are reported on the face of page 2, Form 1040EZ. They are
Wages, interest
Unemployment compensation is reported to the taxpayer on a Form
1099-G
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Learning Objective #4: Calculation of Tax
For taxable income up to $100,000, use tax tables (printed in Appendix D and in the instructions to Form 1040, available on the I R S website).
Tax rate schedules are used for higher income (printed in Appendix F).
Tax tables calculate tax at the midpoint of the income range on the table.
Tax rate schedules calculate tax precisely.
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Taxpayers who have taxable income up to $100,000 will use the tax tables to determine the amount of tax liability. These tables are easy to use and will reduce calculation errors.
If the taxable income is $100,000 or more, taxpayers use the tax rate schedules.
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Learning Objective #4: Calculation of Tax Concept Check 1-4 1
Taxpayers with taxable income under $100,000 must calculate their tax liability using the tax tables. True or false?
True
Refer to the tax tables. What is the tax liability of a married couple with taxable income of $91,262?
$11,798
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Learning Objective #4: Calculation of Tax Concept Check 1-4 2
Using the tax rate schedule in Table 1-2, determine the tax liability (to the nearest penny) for a married couple with taxable income of $91,262.
$11,794.64
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Learning Objective #3: Tax Payments
Tax liability is generally paid throughout the year through withholding tax payments deducted from wages.
Withholding payments are reported on W-2.
Low income taxpayers may be eligible for the Earned Income Credit.
Discussed in chapter 9 with other credits.
A tax return is also used to settle up with the I R S at the end of the year.
When filing a tax return, taxpayers will either
Owe the I R S (tax liability > payments).
Receive a refund (tax liability < payments).
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Individuals who receive income from wages pay some or all of their tax liability throughout the year with withholding payments that are deducted from their paycheck. These withholding amounts are sent to the IRS and credited to the account of the taxpayer.
In a way, a tax return is the document used to settle up with the IRS at the end of the year.
A taxpayer has earned income. Most taxpayers have wage income so they have already paid much of their liability. When a taxpayer gets to the bottom of a 1040, he or she will either owe the IRS some additional money or will receive a refund for excess payments.
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Learning Objective #3: Tax Payments Concept Check 1-5
Taxpayers pay all of their tax liability when they file their tax returns. True or false?
False
Brets tax liability is $15,759. His employer withheld $15,367 from his wages. When Bret files his tax return, will he be required to pay or will he get a refund? What will be the amount of payment or refund?
Required to pay, $392
An Earned Income Credit will increase the amount of tax liability. True or false?
False
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Learning Objective #5: Tax Authority 1
Tax authority is the body of law, regulation, and precedent that guide taxpayers, the I R S, and the courts in the proper application of tax law.
Three types of primary tax authority:
Statutory sources.
Administrative sources.
Judicial sources.
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Although the Internal Revenue Code is a large and complex document, it is not always totally clear, it does not answer each and every situation, and it is subject to interpretation. Tax authority is the body of law, regulation, court cases, and precedent that guide everyone in the practical application of the Internal Revenue Code.
The three types of primary tax authority are statutory, administrative, and judicial.
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Learning Objective #5: Tax Authority 2
Statutory sources of tax authority.
16th amendment to the U.S. Constitution.
Internal Revenue Code (I R C).
Passed by Congress and signed into law by the president.
Committee reports from tax law process.
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Statutory authority is derived from the 16th amendment to the constitution, the Internal Revenue Code (the law), and the committee reports generated as part of the process of passing the law.
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Learning Objective #5: Tax Authority 3
Administrative sources of tax authority, in order of strength:
Treasury Regulations (I R S Regulations).
Revenue Rulings.
Revenue Procedures.
Private Letter Rulings.
I R S Notices.
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Administrative sources of tax authority are derived from IRS Regulations, and IRS pronouncements such as Revenue Rulings, Revenue Procedures and the like.
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Learning Objective #5: Tax Authority 4
Judicial sources of tax authority.
Courts resolve disputes between taxpayers and the I R S.
Initial court of jurisdiction is either the
Tax Court.
U.S. District Court.
U.S. Court of Federal Claims.
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Courts also create tax authority when they rule on cases that are brought before them. Taxpayers or the IRS can begin a case in one of three courts. Cases can be appealed to higher courts.
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Learning Objective #5: Tax Authority 5
Tax Court and District Court rulings can be appealed to the U.S. Court of Appeals and then to the Supreme Court.
U.S. Court of Federal Claims rulings can be appealed to the U.S. Court of Appeals Federal Claims and then to the Supreme Court.
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Depending on where a case begins, the appeal process can take slightly different routes. Ultimately, the U.S. Supreme Court is the final court in any route. The Supreme Court hears very few tax cases during a year.
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Learning Objective #5: Tax Authority
Concept Check
The committee charged with considering tax legislation in the House of Representatives is called the
Committee.
Ways and Means
The most commonly relied-on statutory authority is
The Internal Revenue Code
All tax legislation must pass both the House of Representatives and the Senate and be signed by the president of the United States in order to become law. True or false?
True
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Learning Objective #5: Tax Authority
Concept Check 1-7
Administrative tax authority takes precedence over statutory tax authority. True or false?
False
I R S Revenue Procedures are applicable only to the taxpayer to whom issued. True or false?
False
The administrative tax authority with the most strength of authority is
I R S Treasury Regulations
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Learning Objective #5: Tax Authority Concept Check 1-8
The U.S. Supreme Court does not accept appeals of tax cases. True or false?
False
A taxpayer who does not agree with an assessment of tax by the I R S has no recourse. True or false?
False
A taxpayer who does not want to pay the tax assessed by the I R S prior to filing a legal proceeding must use the
Court.
Tax
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Learning Objective #6: Circular 230 1
Circular 230 sets forth rules which must be followed by all paid tax preparers.
Includes C P A s, attorneys, enrolled agents, and any other individual who receives compensation for preparing a tax return, providing tax advice, or practicing before the I R S.
Circular 230 sets forth ethical standards and expectations.
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Circular 230 provides for standards of practice for all paid tax preparers.
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Learning Objective #6: Circular 230 2
Failure to comply with Circular 230 will subject the paid preparer to suspension or disbarment from I R S practice, public censure, fines, and civil or criminal penalty.
Rules are far reaching and complex.
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Failure to comply with Circular 230 will subject the paid preparer to numerous sanctions.
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Learning Objective #6: Circular 230 3
Paid tax preparers must obtain a preparer tax identification number (P T I N).
Must be renewed annually.
Preparers who are not C P A s, attorneys, or enrolled agents must pass a competency exam and annually obtain continuing education.
C P A s, attorneys, and enrolled agents must also obtain continuing education.
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Circular 230 requires registration and establishes continuing education requirements.
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Learning Objective #6: Circular 230 4
Paid preparers must:
Sign all tax returns they prepare.
Provide a copy to clients.
Return records to clients.
Exercise due diligence and best practices.
Disclose non-frivolous tax positions.
Notify clients of errors on a client return.
Provide information to the I R S.
Inform a client if the client made an error.
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Circular 230 sets forth actions which a paid preparer must do.
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Learning Objective #6: Circular 230 5
Paid preparers must NOT:
Take a position unless it has a realistic possibility of being sustained.
Charge a contingent fee.
Charge an unconscionable fee.
Unreasonably delay matters with I R S.
Cash an I R S check for a client.
Represent a client if a conflict of interest exists.
Make false or fraudulent statements.
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Circular 230 sets forth actions which a paid preparer must NOT do.
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Income
Permitted Deductions from Income
Taxable Income
Appropriate Tax Rates
Tax Liability
Tax Payments and Tax Credits
Tax Refund or Tax Due with Return
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2020 Edition
Cruz, Deschamps, Niswander, Prendergast, Schisler
Chapter 2
Expanded Tax Formula, Form 1040, and Basic Concepts
2020 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
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Learning Objective #1: The Expanded Tax Formula and the Major Sections of Form 1040 1
The Tax Return.
Basic Form 1040.
Schedules for Form 1040.
Adjusted Gross Income (A G I).
Gross income minus a list of permitted deductions.
Many deductions and credits are based on A G I.
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Learning Objective #1: The Expanded Tax Formula and the Major Sections of Form 1040 2
The Expanded Tax Formula
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Learning Objective #1: The Expanded Tax Formula and the Major Sections of Form 1040 Concept Check 2-1
When preparing a tax return, you will seldom use any of the schedules. True or False?
False
The concept of Adjusted Gross Income (A G I) is important because many deductions and credits reported on the tax return are computed based on the amount shown as A G I? True or False?
True
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Learning Objective #2: Determine the Proper Filing Status 1
There are five filing statuses:
Single.
Not married as of the last day of the year.
Married Filing Jointly (M F J).
Must be legally married on the last day of the year.
The marital status of a couple is determined under the laws of the state in which they reside.
It does not matter if only one has earned income.
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Learning Objective #2: Determine the Proper Filing Status 2
Married Filing Separately (M F S).
Must be married but elect to file separately.
The standard deduction can be taken only if both make the same selection.
Must show the social security number of the other spouse on the taxpayers return.
Only in unusual circumstances is it advantageous for a married couple to file M F S.
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Learning Objective #2: Determine the Proper Filing Status 3
Head of Household.
Must be unmarried at the end of the year.
A married taxpayer living apart from the spouse during the last six months of the year might qualify as unmarried.
Must be a U.S. citizen or resident.
Must maintain a household for a qualifying person for more than half the year.
Exception: Parents can live in a separate household.
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Learning Objective #2: Determine the Proper Filing Status 4
Qualifying Widow(er) with Dependent Child.
Permitted for only two years.
Must be eligible to file a joint return the year the spouse died.
Must be unmarried.
Must pay for more than half the costs of a household that is the principal place of residence of the taxpayer and child for the entire year.
Exception: temporary absences are permitted.
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Learning Objective #2: Determine the Proper Filing Status Concept Check 2-2 1
Even though you are in the process of getting a divorce, you can file as married filing jointly. True or False?
True
The social security number of the taxpayers spouse must be shown on the taxpayers tax return when filing as married filing separately. True or False?
True
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Learning Objective #2: Determine the Proper Filing Status Concept Check 2-2 2
A surviving spouse who qualified as married filing jointly when the spouse died can file as a qualifying widow(er) for the next two years as long as the surviving spouse pays for more than half the cost of keeping up a household and does not remarry. True or False?
False
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Learning Objective #3: Determine Dependents 1
Taxpayers may have related individuals living with them and/or they may provide financial support for a related individual. As we will see in this section, these individuals may qualify as dependents if they meet certain tests. The existence of dependents is important for determination of child credits, filing status, and other matters.
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Learning Objective #3: Determine Dependents 2
The Dependent must be a qualifying child or relative and meet three general tests:
Dependent taxpayer test:
If the dependent can be claimed by someone else, then the taxpayer cannot claim this person as a dependent.
Joint return test:
The person claimed as a dependent cannot file a joint return with his or her spouse, unless a return is filed only to claim a refund and there is no tax liability on the return.
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Learning Objective #3: Determine Dependents 3
Citizen or resident test.
The dependent must meet one of the following:
be a U.S. citizen, resident, or national.
be resident of Canada or Mexico.
be an adopted child of the taxpayer if the child is a member of the taxpayers household all year and the taxpayer is a U.S. citizen or national.
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Learning Objective #3: Determine Dependents 4
A Qualifying Child must meet five specific tests:
Relationship test.
Age test.
Residency test.
Support test.
Special test for qualifying child of more than one taxpayer.
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Learning Objective #3: Determine Dependents Concept Check 2-3 1
What are the five specific tests you need to meet to claim someone as a qualifying child?
Relationship test
Age test
Residency test
Support test
Special test for qualifying child of more than one taxpayer
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Learning Objective #3: Determine Dependents Concept Check 2-3 2
To meet the age test, a child who is not disabled must be
if a full-time student.
Under 19 years of age, or under 24 years of age and a full-time student.
Also, for years after 2008, the child must be younger than the person claiming the dependency.
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Learning Objective #3: Determine Dependents 5
A Qualifying Relative must meet four specific tests:
Not a qualifying child test.
Relationship or member of household test.
Gross income test.
Cannot have gross income equal or greater than $4,200.
Support test.
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Learning Objective #3: Determine Dependents Concept Check 2-4
You must meet one of these four tests to be a qualifying relative: Not a qualifying child test, relationship or member of household test, gross income test and support test. True or False?
False
A qualifying relative can earn up to $12,000 for the year 2019. True or False?
False
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Learning Objective #4: Determine the Standard Deduction 1
The Standard Deduction for 2019 is:
Single $12,200
Married Filing Jointly $24,400
Married Filing Separately $12,200
Head of Household $18,350
Qualifying Widow(er) $24,400
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Learning Objective #4: Determine the Standard Deduction 2
The Standard Deduction:
Increases for people who are age 65 or older or blind.
If a taxpayer can be claimed as a dependent by another taxpayer, the standard deduction is limited to the higher of $1,100, or the taxpayers earned income plus $350.
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Learning Objective #4: Determine the Standard Deduction 3
Additional Standard Deductions for Taxpayers who are 65 or older or blind
Single $1,650
Married Filing Jointly $1,300
Married Filing Separately $1,300
Head of Household $1,650
Qualifying Widow(er) $1,300
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Learning Objective #4: Determine the Standard Deduction Concept Check 2-5
What is the amount of the standard deduction in each of the following cases:
Taxpayer is single, 42 years of age, and blind
$13,850 ($12,200 + $1,650)
Taxpayer is head of household, 37 years of age, and not blind
$18,350
Taxpayers are married filing jointly, the husband is 67 and the wife is 61 years of age, and neither is blind
$25,700 ($24,400 + $1,300)
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Learning Objective #5: The Amount of Tax Due to the Internal Revenue Service (I R S) 1
Amount of Tax Liability
The tax liability is computed by using the tax tables or the tax rate schedules.
Tax Payments and Credits Reduce the Tax Liability
Withholding by the employer and estimated payments sent to I R S.
Tax credits:
Nonrefundable.
Refundable.
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Learning Objective #5: The Amount of Tax Due to the Internal Revenue Service (I R S) 2
Tax Refund or Amount Due with Return
Excess payment results in a refund.
Remaining tax liability means an amount is owed to I R S.
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Learning Objective #5: The Amount of Tax Due to the Internal Revenue Service (I R S) Concept Check 2-6
Use the tables in the back of the text to determine the tax amount for the following situations
Single taxpayer with a taxable income of $34,640
$3,961
Married taxpayers filing jointly with a taxable income of $67,706
$7,739
What is the limit on the F I C A (social security) amount for 2019?
$132,900
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Learning Objective #6: Interest and Penalties the I R S Can Assess 1
Interest Charged on Assessments
The rate charged is the federal short-term rate plus 3 percentage points.
Examples of some rates for different periods.
Jan. 1, 2019, to Mar. 31, 2019 6%
Apr. 1, 2018, to Dec. 31, 2018 5%
Jan. 1, 2017, to Mar. 31, 2018 4%
Apr. 1, 2016, to Dec. 31, 2016 4%
July 1, 2015, to Mar. 31, 2016 3%
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Learning Objective #6: Interest and Penalties the I R S Can Assess 2
Penalties
Failure to file a tax return.
5 percent per month or fraction of a month, not to exceed 25 percent.
Any income tax return not filed within 60 days of its due date is subject to a minimum penalty of the lesser of $215 or the amount of tax required on the return.
Failure to pay tax penalty.
0.5 percent per month or fraction of a month, not to exceed 25 percent.
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Learning Objective #6: Interest and Penalties the I R S Can Assess 3
Maximum amount is 5 percent per month or fraction of a month, not to exceed 25 percent when both penalties apply to the same situation.
Failure to pay estimated income tax penalty.
Applies if taxpayer fails to pay during the year a minimum of: 90 percent of the current year tax liability, or 100 percent of the prior years tax liability if the taxpayers A G I in the prior year is less than $150,000.
Accuracy-related penalty.
Applies when there is negligence or any substantial understatement.
The rate is 20 percent of the tax due.
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Learning Objective #6: Interest and Penalties the I R S Can Assess 4
Fraud penalty.
Applies to the understatement of tax that is attributable to fraud.
The rate is 75 percent.
Erroneous claim for refund or credit.
The rate is 20 percent on the disallowed amount of the claim if the claim for refund or credit of income filed is found to be excessive.
Not applicable if the fraud or the accuracy-related penalty has been assessed.
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Learning Objective #6: Interest and Penalties the I R S Can Assess Concept Check 2-7 1
A taxpayer filed an automatic extension before April 15 but sent no money to the I R S. He then filed his return by June 2 and paid the amount due of $3,000. What are the amounts for the failure to file a tax return penalty and the failure to pay penalty?
Failure to file does not apply but failure to pay is
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Learning Objective #6: Interest and Penalties the I R S Can Assess Concept Check 2-7 2
Fraud on a tax return can also lead to criminal charges. True or False?
True
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(
)
(
)
(
)
Standard deduction or i
Gross income GI
Per
temized deductions
Ta
mitted deductions from gross income
Ad
xable income TI
Appropriate tax rates
justed Gross Inco
meAGI
–
=
–
=
Tax liability
Tax credits
Other taxes
Tax payments and
refundable credits
Tax refund or tax due with return
=
–
+
–
=
(
)
$$,.%
2
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= Fundamentals of Taxation
2020 Edition
Cruz, Deschamps, Niswander, Prendergast, Schisler
Chapter 3
Gross Income: Inclusions and Exclusions
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Learning Objective #1: When and How to Record Income for Tax Purposes
Income Recognition for Tax Purposes
Similar to the recognition for accounting purposes.
Income must be realized and earned.
However, three additional conditions must be present when the transaction occurs:
Economic benefit of the transaction.
Conclusion of the transaction.
Income from the transaction must not be tax-exempt income.
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Learning Objective #1: When and How to Record Income for Tax Purposes-Concept Check 3-1 1
An individual must recognize income on his or her tax return if the transaction meets three conditions.
Name the three conditions:
Economic benefit
Conclusion
Not tax-exempt income
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Learning Objective #1: When and How to Record Income for Tax Purposes-Concept Check 3-1 2
An individual can exclude certain income from taxation even though a transaction that has economic benefits has occurred. True or false?
True
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Learning Objective #2: The Cash Method of Accounting as It Applies to Income Taxes
Cash Receipts and Disbursements Method
Used by almost all individuals to file their tax returns.
Constructive receipt.
Income is reported in the year the taxpayer receives the right to control the income rather than the year in which its earned.
Receipt of property or services will trigger income recognition.
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Learning Objective #2: The Cash Method of Accounting as It Applies to Income Taxes Concept Check 3-2
Income may be realized in any form, whether in money, property, or services. True or false?
True
If you provide consulting services to your friend and, in exchange, he fixes your car, you and your friend must report on both tax returns the fair market value of the services provided. True or false?
True
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Learning Objective #3:
The Taxability of Components of Gross Income: Interest, Dividends, Tax Refunds, and Soci