Gross Income, AGI, and Taxable Income

• Gross Income, also known as Total Income, includes all taxable income.
• Adjusted Gross Income (AGI) is arrived at after making adjustments (additions and subtractions) to Total Income.
• For AGI includes every type of income that is taxed, however, not every type of income is taxed.
• Income is taxable if the taxpayer receives an economic benefit, the income is realized, and the income is recognized.
• Loans are not taxable because they don't provide an economic benefit.
• Common types of taxed income are:
  • Wages and salaries
  • Interest (except municipal bond interest)
  • Dividends
  • Capital gains and losses
  • Regular IRA distributions
  • Retirement plan distributions
  • Most Social Security payments
  • Income from any type of business (including rental and royalties)
• Common types of income that are not taxed include:
  • Gifts
  • Inheritances
  • Life insurance proceeds
  • Alimony received
  • Child support received
  • Municipal bonds

Tax Planning vs Tax Evasion

• Tax planning uses legal methods to lower tax liability through timing and income shifting strategies.
• Timing strategies postpone income and accelerate expenses when legally possible.
• Income shifting moves income to entities with lower marginal tax rates, where legally possible.
• Tax evasion is intentionally avoiding legally owed taxes and is subject to civil and criminal penalties.

Municipal bonds and Constructive Reciept

• Municipal bonds are issued by government entities other than the federal government, such as states, counties, cities, towns and school districts.
• Constructive receipt: Taxpayers must include income when cash inflows are available unconditionally, regardless of whether the taxpayer uses them.

Exclusions and Deferrals

• Exclusions are income that is never taxed; for example, the gain on the sale of a personal residence.
• Deferrals are income where tax is postponed; installment sales and like-kind exchanges are examples.

Standard Deduction and Itemized Deductions

• Taxpayers take the greater of their Standard Deduction or Itemized Deductions from AGI.
• Standard Deduction amounts are based on Filing Status:
  • Single
  • Head of Household
  • Married Filing Jointly
  • Married Filing Separately
  • Qualifying Widower (Surviving Spouse)
• Taxpayers must qualify for their Filing Status and cannot arbitrarily select one, except married couples can choose to file jointly or separately.
• Itemized Deductions are always for personal expenses, not business or rental expenses.
• Itemized Deductions are for items the taxpayer has paid for, not items with received payment for.
• Itemized Deductions are for specific personal expenses, subject to strict rules for the tax year.
• Itemized Deductions are not for expenses taxpayers think should be deductible or items deductible in other tax years, this course is based on tax year 2021.
• For 2021, Itemized Deductions include medical and dental expenses; state and local income taxes/general sales taxes; real estate property taxes; home mortgage interest; investment interest; cash/non-cash gifts to charity; gambling losses (exceeding winnings); and medical/charitable mileage.
• Records of tax-deductible expenses must be kept to claim Itemized Deductions.

Taxable Income

• Taxable Income is Adjusted Gross Income, less the larger of the taxpayer's Standard Deduction or Itemized Deductions.

Tax Liability

• To determine Taxable Income, Charitable Contributions for those using the Standard Deduction and the Qualified Business Income Deduction are considered first.
• Tax Liability, also known as the Tax, is determined using the Tax Rate Schedule that corresponds to the taxpayer's Filing Status.
• The Tax Liability before Credits must have two additional amounts potentially added:
  • Self-Employment Tax (15.3% of net earnings from self-employment)
  • Alternative Minimum Tax (AMT), which affects a few wealthy taxpayers.

Credits

• Credits reduce the Tax Liability.
• A Nonrefundable Credit can reduce the Tax to "0," but cannot create a Tax Refund.
• A Refundable Credit can create a Tax Refund.
• Credit eligibility often depends on rules for Dependents.
• Dependents must be either a Qualifying Child or a Qualifying Relative.

Qualifying Child Requirements

• Under age 19, or under age 24 if a full-time student, or permanently/totally disabled
• Lived with the taxpayer for more than half the year
• Taxpayer provided more than half of the child's support
• Must be the taxpayer's son, daughter, stepchild, foster child, sibling, or a descendant of any of them.

Qualifying Relative Requirements

• Not restricted by age
• Can be a non-relative living with the taxpayer all year as a household member
• Taxpayer provided more than half the relative's support
• The relative's gross income must be more than $4,300
• Family relationships are broader than for a Qualifying Child
• Include: parents, stepparents, and grandparents.
• A taxpayer cannot claim any dependents who are claimed as a dependent by another taxpayer.

Child Tax Credit

• $3,000 for each child under 18 and $3,600 for each child under 6
• The child must be a Qualifying Child
• This credit is mostly Nonrefundable, but a portion may be Refundable in some cases.

Child and Dependent Care Expenses Credit

• Up to $8,000 for one qualifying person and up to $16,000 for two or more, allowing the taxpayer to work while paying for care.
• A qualifying person is the taxpayer's Qualifying Child who is their dependent and under 13, the taxpayer's spouse unable to care for themselves, or other members of the taxpayer's household who can't care for themselves.
• This credit is refundable in many cases in 2021.

Education Credits

• The American Opportunity Credit has a maximum of $2,500 per student, per year.
• Student must pursue an undergraduate degree at an accredited college or university and be in the first four years of their degree program.
• The Lifetime Learning Credit has a maximum of $2,000 per taxpayer per year, even if more than one person in the taxpayer's household qualifies.
• This credit helps pay for qualified educational expenses, such as tuition and related expenses for post-secondary courses taken to acquire or improve job skills.

Earned Income Credit

• A Refundable Credit
• Taxpayer must be over 19 if they do not have a qualifying child, or they must have a qualifying child
• Taxpayer cannot be claimed as a dependent by another taxpayer
• Unearned income must be $10,000 or less
• Earned income must be within certain limits.
• The Recovery Rebate Credit (Individual Recovery Credit) was a special cash payment to qualified taxpayers only in 2021 due to Covid-19.
• Credits, withholdings, and estimated tax payments reduce the tax liability.
• Either the IRS owes a refund, or the taxpayer owes an additional amount due April 15.

Explanation of Gross Income, Adjusted Gross Income (AGI), and taxable income. Understanding what constitutes taxable income, including wages, interest, dividends, and business income. Overview of non-taxed income sources like gifts, inheritances, and life insurance proceeds.