©SOPHIABENNETT@2024-2025 Monday, August 19, 2024 12:35 AM
AAMS Module 5: Taxation of Investments Exam
Study Guide with Complete Solutions
Basic Tax Formula - Answer✔️✔️-1 Total Income
Minus 2 Adjustments to Income (deductions for adjusted gross income)
Equals 3 (AGI) Adjusted Gross Income
Minus 4 Standard Deduction or Total itemized Deductions
Equals 5 Taxable Income
6 Calculate Tax
Minus 7 Credits
Plus 8 Other Taxes (Self employment tax, etc)
Equals 9 Net Tax Liability (if negative, there's a refund)
Gross Income - Answer✔️✔️-Technically, income from all sources, unless
specifically excluded. Examples include wages, commissions, tips,
honorariums, interest, dividends, net business income, rents, royalties,
unemployment compensation, gambling income, and partnership income.
Exclusions: life insurance proceeds received by a reason of death, muni
bond interest, gifts, workers' comp, child support received, scholarships,
employee fringe benefits.
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Gross income after exclusions are called total income.
Adjusted Gross Income - Answer✔️✔️-The amount remaining when
adjustments are subtracted from gross income.
Taxable Income - Answer✔️✔️-Adjusted gross income reduced by the
greater of the standard deduction or itemized deductions.
Adjustments to Income - Answer✔️✔️-items that reduce total income to
arrive at adjusted gross income. Examples include deductible IRA
contributions, self-employed health insurance deduction, Keogh
contributions, qualified job-related moving expenses for military
personnel, and penalties on early withdrawal of savings. These are often
referred to as "above the line" deductions, or "deductions for AGI."
Taxpayers who are self-employed can deduct one-half of their self-
employment tax as an adjustment to income.
The bargain element on exercise of an ISO is a preference item for the
alternative minimum tax.
Tax Credit - Answer✔️✔️-A dollar-for-dollar offset against the tax liability.
Itemized Deductions - Answer✔️✔️-These are deductions for expenses that
are generally personal in nature. Examples include deductions for property
taxes and mortgage interest on a residence, medical expenses exceeding
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7.5% of AGI (2022), charitable contributions, state and local income taxes
up to $10,000 per couple, and investment interest expenses. These often are
referred to as "below-the-line deductions" or "deductions from AGI."
Additionally, there's Section 199A Qualified Small Business Income from
flow through entities such as S corporations, partnerships, and sole
proprietors may deduct 20% of the qualified business income (QBI). This
deduction is subject to limitations and phaseouts.
Standard Deduction - Answer✔️✔️-Standard deduction refers to an
allowance granted to most individuals in lieu of itemizing deductions. A
taxpayer has the option of using the greater of total itemized deductions or
the standard deduction.
Elderly individuals and/or the blind can claim additional deductions.
$1,400 elderly
$2,800 if both (married)
$3,500 if both (unmarried)
Alternative Minimum Tax (AMT) - Answer✔️✔️-The alternative minimum
tax is a tax imposed on individuals who use various deductions,
exemptions, and tax sheltering mechanisms as a way of making those
individuals pay a minimum amount of tax. Certain tax preference or
adjustment items, such as tax-exempt interest on qualified private activity
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