HS 321 Income Taxation flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Gross income definition

All income from whatever source derived unless specifically excluded by the Code; includes wages, interest, dividends, rents, royalties, and business profits.

Above-the-line deduction

An adjustment subtracted from gross income to arrive at AGI, such as HSA contributions or the deductible half of self-employment tax; available whether or not the taxpayer itemizes.

Standard deduction amount

A flat deduction based on filing status that reduces taxable income; taxpayers may take it instead of itemizing, and it increases for age 65 or older and for blindness.

Itemized deductions

Allowable personal expenses claimed instead of the standard deduction, including medical costs above 7.5% of AGI, capped state and local taxes, mortgage interest, and charitable gifts.

Adjusted gross income

Gross income minus above-the-line adjustments; it is the starting point for itemized deduction limits, many phase-outs, and the calculation of taxable income.

Taxable income formula

AGI minus the greater of the standard deduction or itemized deductions, minus the qualified business income deduction; the result is taxed using the bracket schedule.

Marginal tax rate

The rate applied to the last dollar of taxable income within a bracket; it differs from the effective rate, which is total tax divided by total income.

Long-term capital gain rate

Net gain on assets held more than one year is taxed at preferential 0%, 15%, or 20% rates depending on taxable income, rather than ordinary income rates.

Capital loss limitation

Net capital losses offset ordinary income only up to $3,000 annually ($1,500 if married filing separately); unused amounts carry forward indefinitely.

Carryover basis for gifts

A donee generally takes the donor's adjusted basis in gifted property; if FMV at the gift date is below basis, loss basis is limited to that lower FMV.

Basis at death

Inherited property generally receives a basis equal to fair market value on the date of death, eliminating unrealized gain accrued during the decedent's life.

Wash sale rule

A loss is disallowed if substantially identical securities are purchased within 30 days before or after the sale; the disallowed loss is added to the new basis.

Qualified dividend treatment

Dividends from domestic corporations and qualified foreign corporations held more than 60 days are taxed at long-term capital gain rates instead of ordinary rates.

Municipal bond interest

Interest on state and local government bonds is generally excluded from federal gross income, though it counts in Social Security benefit taxation and may be state taxable.

Scholarship exclusion limits

Qualified scholarships are excluded only to the extent used for tuition, fees, books, and required supplies; amounts for room and board are taxable income.

Self-employment tax

Social Security and Medicare tax on net self-employment earnings, computed at 15.3% on the first $168,600 (2024) and 2.9% above; half is deductible.

Filing requirement threshold

A taxpayer must file when gross income exceeds the standard deduction plus age and blindness additions for that status, or when net self-employment income reaches $400.

Head of household status

Available to an unmarried taxpayer who pays more than half the cost of maintaining a home for a qualifying dependent; it carries a larger standard deduction and wider brackets.

Qualifying child test

Requires relationship, age under 19 or 24 if a student, residency with the taxpayer over half the year, and no self-support; the child cannot provide over half their own support.

Kiddie tax

Net unearned income of a child under 19, or under 24 if a full-time student, above a threshold is taxed at the parents' marginal rate.

Earned income credit

A refundable credit for low- and moderate-income workers with earned income and, in some cases, qualifying children; it phases in, plateaus, then phases out.

Child tax credit

A credit of up to $2,000 per qualifying child under 17, with a refundable portion and phase-out beginning above $200,000 of AGI ($400,000 for joint filers).

Estimated tax safe harbor

No underpayment penalty if payments equal at least 90% of current-year tax or 100% of prior-year tax; the prior-year percentage rises to 110% above $150,000 AGI.

Withholding allowance certificate

Form W-4 tells an employer how much federal income tax to withhold based on filing status, dependents, and other adjustments the employee reports.

IRA deduction phase-out

The traditional IRA deduction is reduced or eliminated for taxpayers covered by a workplace plan whose AGI exceeds status-based thresholds, or for spousal IRA cases.

Roth IRA distribution rules

Qualified distributions are tax-free after age 59 1/2 and five years; contributions come out first, and earnings withdrawn early may be taxable plus a 10% penalty.

HSA triple advantage

Contributions are deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free; requires a high-deductible health plan.

Section 179 expensing

Allows a business to deduct the full cost of qualifying tangible personal property in the year placed in service, subject to annual dollar and income limits.

Bonus depreciation

An additional first-year deduction for a percentage of the cost of qualifying property; the percentage has been phased down from 100% in recent years.

Home sale exclusion

A taxpayer who owned and used a principal residence two of the last five years may exclude up to $250,000 of gain ($500,000 joint).

Alternative minimum tax

A parallel tax system that adds back specified preference items to AMT income, allows an exemption, and applies a 26% or 28% rate; the higher of AMT or regular tax is paid.

Underpayment penalty computation

The penalty equals the federal short-term rate plus three points applied to the underpaid amount for each quarter, computed on Form 2210.