Chapter 8

Question 1

Gross Income

Answer 1

Income from any source derived unless specifically excluded.

Question 2

Adjusted Gross Income (AGI)

Answer 2

Gross income minus FOR AGI deductions.

Question 3

Taxable Income

Answer 3

AGI minus itemized deductions or standard deduction and other deductions such as QBI.

Question 4

Ordinary Income

Answer 4

Income taxed at normal tax bracket rates.

Question 5

Examples of Ordinary Income

Answer 5

Wages, interest income, business income.

Question 6

Preferential Income

Answer 6

Income taxed at special lower rates (0%, 15%, 20%).

Question 7

Examples of Preferential Income

Answer 7

Long-term capital gains and qualified dividends.

Question 8

Long-term Capital Gain

Answer 8

Gain on an asset held longer than 1 year.

Question 9

Qualified Dividend

Answer 9

Dividend taxed at capital gain rates; stock must be held more than 60 days.

Question 10

Capital Asset

Answer 10

Any asset except inventory, accounts receivable, or business-use assets.

Question 11

Steps to Calculate Tax with Preferential Income

Answer 11

1) Separate ordinary and preferential income 2) Compute tax on ordinary income 3) Compute tax on preferential income 4) Add together.

Question 12

Alternative Minimum Tax (AMT)

Answer 12

A separate tax calculation designed to ensure taxpayers pay a minimum level of tax.

Question 13

Tentative Minimum Tax (TMT)

Answer 13

The tax calculated under AMT rules that is compared to the regular tax liability.

Question 14

When AMT is Paid

Answer 14

If TMT is greater than the regular tax liability.

Question 15

AMT Base

Answer 15

AMTI minus the AMT exemption.

Question 16

AMTI (Alternative Minimum Taxable Income)

Answer 16

Taxable income adjusted for AMT preferences and adjustments.

Question 17

AMT Exemption (Single/HOH)

Answer 17

88100

Question 18

AMT Exemption (MFJ)

Answer 18

137000

Question 19

AMT Phase-Out Rule

Answer 19

Exemption reduced by $0.25 for each $1 AMTI above threshold.

Question 20

AMT Tax Rates

Answer 20

26% on first $239,100 of AMT base and 28% on excess.

Question 21

Net Investment Income Tax (NIIT)

Answer 21

Additional tax on investment income for high-income taxpayers.

Question 22

NIIT Rate

Answer 22

3.8%.

Question 23

NIIT Calculation

Answer 23

3.8% × lesser of net investment income or excess AGI above threshold.

Question 24

NIIT Threshold (Single/HOH)

Answer 24

200000

Question 25

NIIT Threshold (MFJ)

Answer 25

250000

Question 26

Net Investment Income Examples

Answer 26

Interest, dividends, capital gains, rents, royalties, passive income.

Question 27

Income Not Included in NIIT

Answer 27

Wages, self-employment income, Social Security benefits.

Question 28

FICA Taxes

Answer 28

Employment taxes consisting of Social Security and Medicare taxes.

Question 29

Social Security Tax Rate (Employee)

Answer 29

6.2% of wages up to $176,100.

Question 30

Medicare Tax Rate (Employee)

Answer 30

1.45% on all wages.

Question 31

Additional Medicare Tax

Answer 31

0.9% on income above $200,000 ($250,000 MFJ).

Question 32

Total Basic Employee FICA Rate

Answer 32

7.65%.

Question 33

Employer FICA Responsibility

Answer 33

Employers match the employee’s 7.65% FICA taxes.

Question 34

Self-Employment Tax

Answer 34

Tax paid by self-employed individuals covering both employer and employee portions of Social Security and Medicare.

Question 35

Net Earnings from Self-Employment (NESE)

Answer 35

Self-employment income × 92.35%.

Question 36

Social Security SE Tax Rate

Answer 36

12.4% on NESE up to $176,100.

Question 37

Medicare SE Tax Rate

Answer 37

2.9% on all NESE.

Question 38

Additional Medicare Tax on SE Income

Answer 38

0.9% on income exceeding threshold levels.

Question 39

SE Tax Deduction

Answer 39

Self-employed taxpayers can deduct 50% of SE tax as a FOR AGI deduction.

Question 40

Child Tax Credit

Answer 40

Credit for taxpayers with qualifying children under age 17.

Question 41

Child Tax Credit Amount

Answer 41

$2,200 per qualifying child.

Question 42

Credit for Other Dependents

Answer 42

$500 per dependent who is not a qualifying child.

Question 43

Child Tax Credit Phase-Out

Answer 43

Reduced $50 for each $1,000 of AGI above $200,000 ($400,000 MFJ).

Question 44

Child and Dependent Care Credit

Answer 44

Credit for expenses paid for care of dependents while taxpayer works.

Question 45

Maximum Expenses for Care Credit

Answer 45

$3,000 for one dependent or $6,000 for two or more.

Question 46

Child Care Credit Rate

Answer 46

20%–35% depending on AGI.

Question 47

American Opportunity Tax Credit (AOTC)

Answer 47

Credit for first four years of higher education.

Question 48

Maximum AOTC

Answer 48

$2,500 per student.

Question 49

AOTC Calculation

Answer 49

100% of first $2,000 of expenses + 25% of next $2,000.

Question 50

Lifetime Learning Credit

Answer 50

Credit for education expenses to improve job skills.

Question 51

Maximum Lifetime Learning Credit

Answer 51

20% of up to $10,000 of expenses (max $2,000).

Question 52

Refundable Tax Credit

Answer 52

A credit that can create a refund even if tax liability is zero.

Question 53

Nonrefundable Tax Credit

Answer 53

A credit that can reduce tax liability to zero but cannot produce a refund.

Question 54

Tax Prepayments

Answer 54

Taxes paid during the year through withholding or estimated payments.

Question 55

Safe Harbor Rule (Avoid Penalty)

Answer 55

Pay 90% of current tax liability or 100% of prior year tax (110% if AGI > $150k).

Question 56

Underpayment Penalty

Answer 56

Interest charged if insufficient taxes are paid during the year.