All Study Guides Federal Income Tax Accounting Unit 1
💰 Federal Income Tax Accounting Unit 1 – Federal Income Tax BasicsFederal income tax is a complex system that affects nearly every American. Understanding key concepts like gross income, deductions, credits, and tax brackets is crucial for navigating the tax landscape. This unit covers the basics of how taxes are calculated and filed.
The tax system involves various forms, schedules, and deadlines. From W-2s to 1040s, each document plays a role in reporting income and determining tax liability. Knowing filing requirements and important dates helps taxpayers avoid penalties and maximize their financial outcomes.
Key Concepts and Terminology
Gross income encompasses all income from whatever source derived, unless specifically excluded by law
Taxable income calculated by subtracting deductions and exemptions from gross income
Tax liability amount of tax owed to the government based on taxable income and applicable tax rates
Credits directly reduce tax liability dollar-for-dollar (Child Tax Credit, Earned Income Tax Credit)
Deductions reduce taxable income before calculating tax liability
Standard deduction flat amount based on filing status
Itemized deductions specific expenses (mortgage interest, charitable contributions) that exceed the standard deduction
Progressive tax system tax rates increase as taxable income increases
Marginal tax rate tax rate applied to the last dollar of taxable income
Tax System Overview
Federal income tax system administered by the Internal Revenue Service (IRS)
Tax year typically follows the calendar year (January 1 to December 31)
Some businesses may use a fiscal year
Taxes withheld from paychecks throughout the year (Form W-4)
Taxpayers file annual tax returns to report income, claim deductions and credits, and calculate tax liability
Self-employed individuals make estimated tax payments quarterly
Tax returns due April 15th (or next business day if falls on a weekend or holiday)
Extensions available to October 15th
Refunds issued if taxes withheld or paid exceed tax liability
Additional taxes owed if tax liability exceeds taxes withheld or paid
Types of Taxpayers and Filing Statuses
Individuals U.S. citizens and resident aliens required to file based on income thresholds
Married couples may file jointly combining their income and deductions
Qualifying Widow(er) status available for two years after spouse's death
Married Filing Separately each spouse files their own return, but may lose certain tax benefits
Head of Household unmarried individual who pays more than half the cost of maintaining a home for a qualifying person (child or dependent parent)
Trusts and Estates separate legal entities that may be required to file income tax returns
Partnerships flow-through entities that pass income and deductions to individual partners
Corporations taxed as separate entities with different tax rates and rules
Income Sources and Recognition
Wages, salaries, and tips earned from employment
Interest income earned from savings accounts, CDs, and bonds
Dividend income earned from investments in stocks or mutual funds
Capital gains profits from the sale of assets (stocks, real estate)
Short-term gains taxed as ordinary income
Long-term gains (assets held more than one year) taxed at preferential rates
Rental income earned from renting out property
Business income profits from self-employment or operating a business
Alimony taxable income for agreements executed before 2019
Unemployment compensation generally taxable at the federal level
Social Security benefits may be taxable depending on total income
Deductions and Credits
Standard deduction flat amount based on filing status (Single, Married Filing Jointly, Head of Household)
Itemized deductions claimed in lieu of standard deduction
Medical and dental expenses that exceed 7.5% of Adjusted Gross Income (AGI)
State and local taxes (SALT) deduction capped at $10,000
Mortgage interest on first $750,000 of mortgage debt
Charitable contributions cash donations up to 60% of AGI, non-cash donations up to 30% of AGI
Above-the-line deductions reduce AGI (student loan interest, educator expenses)
Refundable credits (Earned Income Tax Credit) can result in a refund even if no taxes are owed
Non-refundable credits (Child Tax Credit) can reduce tax liability to zero but not below
Tax Calculation Process
Determine gross income from all taxable sources
Subtract above-the-line deductions to calculate AGI
Subtract standard deduction or itemized deductions from AGI to determine taxable income
Apply tax rates to taxable income to calculate tax liability
Tax brackets vary based on filing status
Subtract tax credits from tax liability
Compare taxes withheld and estimated tax payments to tax liability
Refund issued if payments exceed liability
Additional taxes owed if liability exceeds payments
Report tax liability, payments, and refund/amount owed on tax return
Filing Requirements and Deadlines
Income thresholds for filing vary based on filing status, age, and type of income
Single under 65: $12,950
Married Filing Jointly under 65: $25,900
Self-employed individuals must file if net earnings exceed $400
April 15th (or next business day) deadline for filing federal income tax returns
Automatic 6-month extension to October 15th if Form 4868 filed
Estimated tax payments due quarterly (April 15, June 15, September 15, January 15)
Penalties and interest assessed for late filing and late payment
Amended returns (Form 1040X) filed within 3 years of original return to correct errors or claim additional deductions/credits
Form 1040 main tax return form used to report income, deductions, credits, and calculate tax liability
Schedule A itemized deductions form
Schedule B interest and dividend income form
Schedule C profit or loss from business form (sole proprietorships)
Schedule D capital gains and losses form
Schedule E supplemental income and loss form (rental income, partnerships, S corporations)
Form W-2 wage and tax statement provided by employers
Form 1098 mortgage interest statement provided by lenders
Form 1099 information returns for various types of income (interest, dividends, independent contractor payments)