Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
tax exam 1
| Question | Answer |
|---|---|
| Tax influences political decisions because | Distinguish themselves based on tax rhetoric |
| Tax influences business decisions because | Choice of entity, location, acquisition structure, debt vs equity mix, lease vs buy, and compensation methods |
| Tax influences individual decisions because | Homeownership deductions (mortage interest, property taxes) and retirement saving strategies |
| Average tax rate | Tax / Taxable Income |
| Effective tax rate | Tax / Total Income |
| Marginal tax rate | (New Tax - Old Tax) / (New Taxable Income - Old Taxable Income) |
| Proportional tax | Tax remain constant regardless of tax base e.g. sales tax |
| Progressive tax | Marginal tax rate increases as the tax base increases e.g. federal individual income tax |
| Regressive tax | Marginal tax rate decreases as tax base increases e.g. social security tax due to wage cap |
| Sufficiency | Assessing whether the system generates enough revenue. Uses static forecasting or dynamic forecasting |
| Income Effect | Higher tax rates induce taxpayers to work harder to maintain net income |
| Substitution effect | substitute taxable work with nontaxable leisure |
| Horizontal Equity | taxpayers in similar situations pay the same tax |
| Vertical Equity | taxpayers with greater ability to pay pay relatively more tax than those with lesser ability |
| Tax due | Tax Base x Tax Rate |
| Convenience | Good tax system should be designed to collect revenue without imposing undue hardship or inconvenience on taxpayer |
| Economy | Good tax system should minimize both compliance costs borne by taxpayers (time and money spent on return) and administration costs incurred by the government/IRS to collect and enforce taxes |
| Taxes influence which of the following decisions? | Political decisions, personal decisions, business decisions |
| Filing requirements for individuals | 2026 gross income over 16,100 |
| Individual tax due date | 15th of 4th month of end of tax year |
| Individual extention | Allows the taxpayer to delay filing a tax return but does not extend the due date for tax payments |
| 30- day letter from IRS | 30 days to either (1) request a conference with an appeals officer, who is independent and resides in a separate IRS division from the examining agent, or (2) agree to the proposed adjustment |
| Civil pentalties | Monetary penalties imposed when taxpayers violate tax statutes without reasonable without reasonable cause |
| Circular 230 | Regulation governing tax praxtice and applied to all persons practicing before IRS |
| Open facts | Not yet occurred, can be altered, and different facts may result in different tax consequences |
| Closed facts | Facts already occured |
| Corporation XYZ has a tax year that ends on August 31. When will its tax return be due? | December 15th |
| When is the tax return due for Partnerships and S corps with a tax year ending on June 30th? | September 15th |
| Bill files their 2022 federal tax return on September 6, 2023, after receiving an automatic extension to file their return by October 15, 2023. When does the statute of limitation end for their 2022 tax return? | September 6, 2026 |
| When does statute of limitations typically end for a tax return? | Three years of latter: tax return’s original due date or when return was actually filed |
| Which trial-level court allows for a possible jury trial? | U.S. district courts |
| What are the consequences of tax professional failing to comply with statutes, rules, and codes of conduct? | Admonishment, suspension, barred from practicing, compensatory damages |
| Individual income tax formula | "Gross income - For AGI = AGI |
| AGI - From AGI = Taxable Income | |
| Taxable Income x Tax Rates = Income Tax Liability + Other Taxes - Credits - Prepayments = Tax Due (Refund)" | |
| Capital Asset Exceptions | Capital assets include all property EXCEPT accounts receivable, inventory, and assets used in a trade or business (e.g., supplies, machinery) |
| All-inclusive income concept | all realized income is included in gross income unless a tax provision allows exclusion or deferral under IRC 61(a) |
| Excluded income | never included in taxable income e.g. gain on sale of personal principal recidence, municipal bond interest |
| Deferred income | income realized but included in a subsequent tax year e.g. installment sales, like-kind exchanges |
| two types of income are subjected to a tax rate not provided for in the tax rate schedule | 1. Net long-term capital gains 2. Qualified dividends are both taxed at preferedentail tax rates rather than progressive |
| For AGI deductions | |
| From AGI deductions | Below the line, ded from AGI to get TI. Greater of standard ded OR item ded (mort int, state inc taxes, charity contr), AND specific non-item from AGI ded (ded for 65+, qual car loan int, charity contr for nonitem, qual tips, qual OT, qual business inc) |
| qualifying child four tests | Relationship test, age test, residence test, and support test with tiebraking rules |
| qualifying relative three tests | Relationship test, support test, and gross income test |
| Five filing status standard deductions largest to smallest | 32,200 Married filing jointly/Qualifying surviving spouse, 24,100 Head of household, 16,100 Married filing separately/Single |
| qualifications for head of household filing status | Unmarried at end of year, Not qualifying surviving spouse, Pay more than half the costs of keeping up a home during the year, Lived in taxpayer’s home with “qualifying person” for more than half of the year (not parents) |
| What is a requirement for someone to qualify as a taxpayer’s dependent? | Must be a qualifying child or qualifying relative of taxpayer |
| In order to qualify as head of household, a taxpayer must meet which of the following criteria? | Lived in taxpayer’s home with a “qualifying person” for more than half of one year |
| form of income receipt | income is taxable regardless of form received (cash, property, or services) |
| MAGI | regular AGI (-50% social security benefits) + tax-excempt interest income, excluded foreign income and other certain deductions for AGI |
| Assignment of income doctrine | earned income is taxed to taxpayer providing servicetaxed to individuals who own property when income accrues |
| Unearned income (property) | income from property (e.g. dividends, interest, rental income) is taxed to individuals who own property when income accrues |
| alimony post 2019 | not included in gross income for received or deductibles for payer |
| alimony pre 2019 | amount of alimony is included in gross income for receiver and deductible For AGI for payer |
| Alimony | transfer of cash made under a written separation agreement or divorce decree, separation or divorce decree doesn’t designate payment as nonalimony, spouses don’t live together when payment is made, payments cannot continue after recipient death |
| Municipal bond interest | 100% excluded from federal gross income, recognized as subsidy to state and local governments |
| Damage Awards Taxability | Compensatory damages for physical injury/sickness are excluded; punitive damages and non-physical injury damages are 100% taxable |
| Gain on sale of principal residence | Exclude up to $250,000 ($500,000 MFJ) of gain; requires meeting ownership and use tests for at least 2 out of the 5 years prior to sale |
| When does recognition of income occur for taxpayers? | When income is taxed |
| What is the defining characteristic of alimony for tax purposes? | Must be paid in cash under a written separation agreement of divorce decree |
| Which of the following are conditions under which prizes, awards, and gambling winnings can be excluded from gross income? | For employee length of service or safety achievement |
| Incentive Stock Options (ISO) | No taxable income on grant date or exercise date, only taxable on sale date |
| Tax consequence for ISO | basis = exercise price; long-term capital gain on sale if held 2 years from grant and 1 year from exercise |
| Restricted stock without 83(b) | Taxed on FMV as ordinary income on vesting date |
| Restricted stock with 83(b) | Taxed on FMV as ordinary income on grant date; future growth is capital gain |
| Nonqualified stock options (NQO) | requires employees to report tax bargain price (FMV - exercise price) on exercise date (as compensation deduction) and on sale date |
| 2 employee tax consequences for NQO: | "Ordinary income = FMV - exercise price, Capital gain/loss = Sales price - stock basis, Holding period: exercise-to-sale period |
| Form W-2 | Summarizes employee’s total annual taxable salary/wages, social security wages, medicare wages, and federal, state, local income tax withholdings |
| Form W-4 | Generated by employee, filled upon hire or when circumstances change to direct future income tax withholding from payment |
| Nontaxable fringe benefits | an employer-provided benefit that may be excluded from employee’s income |
| §119 meal exclusion requirements | Provided on the business premises of the employer AND Provided at convenience of employee |
| §119 lodging exclusion requirements | Provided on business premises of employer, Provided for convenience of employer AND Employee is required to accept lodgin as condition of employment |
| Statutory Exclusion Dollar Limits for Fringe Benefits | Group-Term Life (§79): Excl prems for coverage up to 50,000, Edu Assistance (§127): Excl up to 5,250 per year, Qualified Transp (§132(a)(5)): Excl up to 340/m for transit, Flexible Spending Accts (§125): Max 3,400 salary for health FSA with $680 carryover |
| Which constitues a tax? | Payment for rental car use of 3 percent of bill to pay for the roads |
| Which does not constitue a tax? | Payment for driver’s license |
| Net capital losses | Losses in excess of $3,000 are carried forward indefinitely |
| Tax | Mandatory payment required by government agency that is unrelated to any specific or direct benefit received by the taxpayer |
| Explicit tax | Direct monetary taxes paid directly to government entities (e.g., income, sales, property taxes) |
| Implicit tax | Indirect taxes resulting from a tax advantage granted to certain transactions, measured as the reduced before-tax return produced by a tax-favored asset compared to a taxable asset |
| Static forecasting | Projects tax revenues assuming taxpayer behavior remains unchanged after a tax law update |
| Dynamic forecasting | Projects tax revenues by predicting taxpayer behavioral responses |
| 90-day letter (statuary notice of deficiency) | Issued if an agreement is not reached during an audit, 30-day letter, or Appeals Conference. The taxpayer has 90 days to either pay the tax or petition the U.S. Tax Court |
| Circular 230 Subpart A | Defines who may practice before the IRS and what practicing entails |
| Circular 230 Subpart B | Outlines practitioner duties, restrictions, error disclosures, and fee rules |
| Circular 230 Subpart C & D | Details disciplinary proceedings and administrative sanctions |
| Circular 230 Subpart E | Covers miscellaneous administrative provisions |
| U.S. Tax Court | Tax law experts; no advance tax payment required; no jury trial |
| U.S. District Court | Local generalist court; tax deficiency must be paid upfront; **jury trial available** |
| U.S. Court of Federal Claims | National generalist court in Washington D.C.; tax deficiency must be paid upfront; no jury trial |
| What are common civil penalties and fees associated? | Failure to file (5% unpaid tax/m), failure to pay (.5% unpaid tax/m), substantial understatement (20% of under), civil fraud (75% of related to fraud) |
| What are 3 types of IRS audits? | Correspondence examination, office examination, field examination |
| Capital gains/losses rule | Short-term taxed at ordinary income tax rates and long-term taxed at preferential rates (0%, 15%, 20%) |
| Age test | Must be younger than the taxpayer AND either under age 19 at year-end, OR under age 24 and a full-time student, or permanently disabled |
| Support test | Child must not provide more than half of their own support (excl scholarships) |
| Tiebreaker Hierarchy | Parents prevail over nonparents; parent with longer residence wins; parent with higher AGI wins if residence is equal; nonparent with highest AGI wins |
| Qualifying Relative Gross Income Limit | Gross income must be **less than $5,300** in 2026 |
| Head of Household Parent Exception | A dependent parent does not have to live in the taxpayer's home, provided the taxpayer pays 50% of maintaining a separate household for the parent |
| Child Tax Credit | $2,200 per qualifying child under age 17 at year-end |
| Other Dependent Credit | $500 for dependents age 17+ or qualifying relatives |
| Realization Principle | Requires a transaction with another party that results in a measurable change in property rights |
| Return of Capital Principle | Tax basis (cost) is recovered tax-free because it represents an investment recovery rather than an economic benefit |
| Tax Benefit Rule | Refunds of prior-year deductions are included in gross income only to the extent the prior deduction reduced tax liability[31][32] |
| Claim of Right | Income recognized when there are no restrictions on use of income (e.g., no obligation to repay) |
| Social Security Taxability Tiers (Single Filers) | Based on Modified AGI + 50% Social Security Benefits. <25,000: 0%, 25,000-34,000: up to 50%, >34,000: up to 85% |
| Sale of Principal Residence Exclusion (§121) | Exclude up to $250,000 ($500,000 MFJ) of realized gain (Requires meeting ownership and use tests for at least 2 out of 5 years prior to sale) |
| Statutory Fringe Benefit Limits Group-Term Life (§79) | Exclude coverage up to $50,000 |
| Statutory Fringe Benefit Limits Educational Assistance (§127) | Exclude up to $5,250/year |
| Statutory Fringe Benefit Limits Dependent Care (§129) | Exclude up to $7,500/year |
| Statutory Fringe Benefit Limits Qualified Transportation (§132(a)(5)) | Exclude up to $340/month for transit/parking |
| Statutory Fringe Benefit Limits Health FSA (§125) | Max $3,400 salary set-aside, with up to $680 allowable carryover |
| §104(a)(2) Physical injury exclusion | only compensatory damages received on account of physical personal injury or physical sickness are excluded (compensation for emotional distress is also excluded from gross income if it is directly tied) |
| §61 Non-physical injury | damages received for non-physical injuries (defamation, reputation) are fully taxable |
| Democratic tax rhetoric | tax high earners, higher corporate taxes, lower tax rates on large businesses, relief for working families, prioritizing investments |
| Republican tax rhetoric | lower tax rates for indivdual income tax brackets and corporate tax rates (private spending is more efficient than government) |
| alimony post 2019 | not included in gross income for receiver or not deductible for payer |
Created by:
444ali