Employee Benefits Include the below:
Above the Line Deductions are adjustments deducted from gross income to arrive at adjusted gross income (AGI) for Individual Tax Payers.
Examples of Above the Line Deductions are:
1) Educator expenses
2) Health savings account deduction
3) Moving expenses for military
4) Penalty on early withdrawal of savings
5) Alimony paid pursuant to divorce finalized before 2019
6) Jury duty repayment
7) IRA deduction
8) 50% of self-employment tax
9) Self-employed SEP and qualified plans
10) Self-employed health insurance deduction
11) Student loan interest deduction
The QBID is available to non-corporate taxpayers, including Individuals, Trusts, and Estates.
The Sec. 199A deduction is available to non-corporate taxpayers who have qualified business income, which requires the income to be from qualified pass-through entities. Qualified pass-through entities include sole proprietorships, S corporations, partnerships, trusts, and estates.
Qualifying business income
1) Is effectively connected with the conduct of a trade or business within the U.S.
2) Is included in taxable income for the tax year
3) Comes from a flow-through entity
4) Is from core activities
Qualified business income is items of income, gain, deduction, and loss to the extent such items are effectively connected with the conduct of a trade or business within the United States; it does not include wages and foreign income.
Qualified business income does not include the following:
1) Income from Non-Core Activities
2) Capital gains and losses
3) Dividend income
4) Nonoperating interest income
5) Interest income attributable to working capital
6) Foreign currency gains
7) Income from Businesses as Reasonable Compensation
8) Salaries and wages from S corporations
9) Guaranteed payments from partnerships
The overall QBID is 20% of the lesser of
1. Qualified business income or
2. Taxable income – Net capital gains.
NOTE: Net capital gains = Net long-term capital gains – Short-term capital loss
For each qualified trade or business of a taxpayer, the deductible amount is limited to the lesser of (1) 20% of the taxpayer’s QBI with respect to the qualified trade or business or (2) the W-2 wages/qualified property limit, which is the greater of (a) 50% of the W-2 wages with respect to the qualified trade or business or (b) 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.
Qualified business losses (QBLs) can only be carried forward to reduce the amount of qualified business income (QBI) in later years. Qualified business income deductions do not affect the taxpayer’s basis in the flow-through entity.
Taxable Income = AGI – Itemized Deduction on Schedule A or the standard deduction – QBID
Standard Deductions
Persons who are not allowed Standard Deductions are:
1) Persons who itemize deductions
2) Nonresident alien individuals
3) Individuals who file a “short period” return
4) Married individuals who file a separate return and whose spouse itemizes
5) Partnerships
6) Estates or Trusts
The standard deduction is the sum of the basic standard deduction and the additional standard deduction.
Standard Deduction Limits for 2020 are:
Married Filing Jointly / Qualifying Widower – $24,800
Head Of Household – $18,650
OTHERS – $12,400
An additional standard deduction ($1,650) is allowed for a taxpayer if, during the year, the taxpayer is age 65 or over or blind. The respective amounts are doubled if the taxpayer is both elderly and blind.
The basic standard deduction amount of a student under age 24 who is claimed as a dependent on another individual’s income tax return is limited to the greater of either $1,100 or the dependent’s earned income for the year plus $350 up to the otherwise applicable basic standard deduction amount. Earned income does not include either dividends or capital gains from the sale of stock
Itemized Deductions
The six categories of itemized deductions are:
1) Medical and dental expenses
2) Taxes paid
3) Interest paid
4) Charitable contributions
5) Casualty and theft losses
6) Other itemized deductions
3 Sources of Authoritative Federal Tax Law are:
Legislative law
Administrative law
Judicial law
Legislative Law
Legislative law, which comes from Congress is authorized by the constitution and consists of the Internal Revenue Code and Committee Reports.
The Internal Revenue Code of 1986 is the primary source of Federal Tax Law. It imposes income, estate, gift, employment, and miscellaneous excise taxes and provisions controlling the administration of federal taxation. It is the most authoritative source of tax law.
Administrative Law
Administrative law implemented and enforced by the Treasury Department includes
Treasury regulations
Revenue rulings
Revenue procedures
Private Letter rulings (PLRs)
Internal Revenue Bulletins (IRBs)
IRS Publications
Judicial Law
The Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims courts are referred to as courts of original jurisdiction, or trial courts, for tax matters. There are three levels of federal courts that hear tax cases. They are trial courts, appellate courts, and high court.
| A taxpayer’s accuracy-related penalty due to disregard of rules and regulations, or substantial understatement of income tax, may be avoided if the return position is adequately disclosed and has a reasonable basis. Generally, the penalty is equal to 20% of the underpayment. Substantial understatement of income tax occurs when the understatement is more than the larger of 10% of the correct tax or $5,000 |
| A taxpayer’s accuracy-related penalty due to disregard of the rules and regulations or substantial understatement of income tax may be avoided if the return position is adequately disclosed and has a reasonable basis. Positions concerning tax shelters may result in or increase an accuracy-related penalty. |
Original and Extended Due Dates of filing of return of income for a calendar year tax payer
| Return Type Original Due Date Extended Due Date S corporation March 15 September 15 Partnership March 15 September 15 Estate and trust April 15 September 30 Individual April 15 October 15 Exempt organization May 15 November 15 |
| A C corporation must file its return on or before the 15th day of the 4th month following the close of the tax year. For a calendar-year-end corporation, the due date for a tax return is 4/15/Yr 2. By filing Form 7004, the corporation receives an automatic 6-month extension for filing the tax return, which moves the due date to 10/15/Yr 2. However, the corporation must pay its estimated tax liability by the original due date. The time for payment of the taxes is not extended. |
| A calendar-year S corporation return is due on March 15 of the following year. Assuming delivery in due course, a postmarked date will be deemed the filing date. Returns filed early will be considered as filed on the last day prescribed for filing, which is March 15. Thus, the statute of limitations on this return will commence March 16, 2021. |
| A deduction is allowed for foreign income taxes paid or accrued during the taxable year. Alternatively, both individual taxpayers and corporations may claim a Foreign Tax Credit on income earned and subject to tax in a foreign country or U.S. possession. One may not claim both the deduction and the credit. |
| The Foreign Tax Credit limit is the proportion of the taxpayer’s tentative income tax (before the Foreign Tax Credit) that the taxpayer’s foreign source taxable income bears to his or her worldwide taxable income for the year. Foreign Tax Credit is applied against gross tax liability before all other credits. It is not creditable against accumulated earnings tax and personal holding companies tax |
| The limit must be applied separately to nonbusiness interest income (passive income), foreign branch income, global intangible low taxed income (GILTI) and general income |
| The Foreign Income Tax Credit is equal to the lesser of the actual foreign tax paid or the Foreign Tax Credit limit. However, the FTC for the GILTI basket is limited to 80% of the GILTI Inclusion |
| The unused foreign tax credit may be carried back 1 preceding year and then forward to the following 10 taxable years |
| Each quarterly estimated tax payment required is 25% of the lesser of 100% of the prior year’s tax, provided the tax liability existed and preceding tax year was 12 months (not for corporations with taxable income ≥ $1 million), 100% of the current year’s tax, or 100% of the annualized income (for corporations with uneven income). |
| The definition of tax for this purpose is found in Sec. 6655(f). This definition includes the alternative minimum tax. |
| An extension of time to file the tax return does not provide an extension of time to pay the tax liability without incurring interest and/or penalty. |
| Under Sec. 6655(d), the minimum installment is 25% of the required annual payment (the lesser of 100% of current tax or 100% of preceding year’s tax). |
| Paying 100% of the prior years tax is not an option for a large corporation. A large corporation is one with taxable income of $1 million or more during any 3 preceding years. Hence, Large corporations are not able to avoid underpaying their taxes by relying on the 100% of the tax shown on the return for the preceding year exception. |
| For the first quarter, estimated payments of large companies (taxable income greater than $1 million) should be 25% of the lesser of 100% of the current year’s tax or 100% of the prior year’s tax. Estimated payments of large companies (taxable income greater than $1 million) should be 25% of the current year’s tax for the second, third, and fourth quarter. |
| The PHC tax is a 20% penalty tax imposed on the undistributed income of a corporation that meets the following two tests. Stock ownership test More than 50% by value is owned by 5 or fewer shareholders at any time during the last half of the year. Nature of income test 60% or more of adjusted ordinary gross income is personal holding company income (e.g., taxable interest, dividends, royalties, net rental income, personal service income by a 25% owner) |
| A personal holding company tax is assessed on the undistributed personal holding company income (PHCI) of many C corporations. This tax is self-assessed when more than 50% of the value of the corporation’s shares are owned by five or fewer shareholders at any time during the last half of the fiscal year, and 60% or more of AGI is PHCI. PHCI includes taxable interest and dividends received from an unrelated domestic corporation, royalties, net rental income but not tax-exempt interest |
| PHCI includes personal service income by a 25% owner. Eg. Amounts received by corporations under personal service contracts involving a 25%-or-more shareholder are personal holding company income if the contract designates specifically that only the shareholder will provide the services |
| Rents are excluded if they constitute more than 50% of the corporation’s adjusted ordinary gross income and if PHCI other than rents (reduced by dividend distributions) is not in excess of 10% of ordinary gross income. For this purpose, rents are rental income minus depreciation, property taxes, and allocable interest. |