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Tax Law Basics

Tax Law Basics. Income Overview. Taxable income versus nontaxable income (including excluded income) Earned income versus unearned income. Taxable Versus Nontaxable Income. Basic tenet of the income tax code: Income or gain, from whatever source derived, is taxable ...

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Tax Law Basics

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  1. Tax Law Basics

  2. Income Overview • Taxable income versus nontaxable income (including excluded income) • Earned income versus unearned income NTTC Training 2013

  3. Taxable Versus Nontaxable Income • Basic tenet of the income tax code: Income or gain, from whatever source derived, is taxable... unless the code says it is not taxable • Table B on D-1 in Pub 4012 has examples of income that is not taxable Pub 4012, Page D-1 NTTC Training 2013

  4. Taxable Versus Nontaxable Income Quiz Pub 4012, Page D-1 • Is this taxable? • T-Bill interest income? • Yes (state may differ) • Church bingo winnings? • Yes, a prize • Inherited house? • No • Interest earned inside a qualified IRA? • No (wait until distributed) NTTC Training 2013

  5. Taxable Versus Nontaxable Income • Even though not taxable, must input certain nontaxable income • Exempt interest income • Exempt interest income dividends • May affect other calculations e.g. taxable portion of social security benefits NTTC Training 2013

  6. Earned Versus Unearned Income Pub 4012, Page I-1 • Definition differs – must check rules for particular benefit • Example: • For earned income credit • Earned income does not include penal income • For dependent care credit • Earned income does include penal income NTTC Training 2013

  7. Earned Versus Unearned Income • Earned income usually includes (for in-scope returns): • W-2 wages • Schedule C – business income • (there are more types of earned income) NTTC Training 2013

  8. Earned Versus Unearned Income • Investment income is unearned income for in-scope returns – examples: • Interest • Dividends • Capital gains or losses • Royalties NTTC Training 2013

  9. Earned Versus Unearned Income • Other types of unearned income for in-scope returns • Land rents • Unemployment • Retirement income • Social security benefits (there are more types of unearned income) NTTC Training 2013

  10. Deductions and Credits • A grace of the law • If there is not a provision to allow the deduction, it is not deductible • To claim any credit, must satisfy all requirements NTTC Training 2013

  11. Deductions • Reduce income otherwise subject to tax • Types: • Adjustments to gross income • Itemized or standard deduction • Personal exemption deduction NTTC Training 2013

  12. Credits • Reduce tax liability dollar for dollar • Nonrefundable • Limited to amount of tax • No cash back • Refundable • Cash back if exceed tax liability NTTC Training 2013

  13. Tax Law Basics Comments? Questions? NTTC Training 2013

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