2.3 - Tax Computations & Credits Flashcards
The ordinary income tax rates for individuals are what percentages (increase as income increases):
10, 12, 22, 24, 32, 35, and 37
Long term capital gains and qualified dividends are taxed at:
Preferential income tax rates
(0%, 10%, or 20% increasing as income increases)
With what structure does the marginal tax rate increase as taxable income increases?
Progressive tax structure
Tax credits reduce what?
Personal tax liability
What are the two basic types of tax credits?
Non refundable personal tax credits
Refundable credits
Non refundable personal tax credits do what to the personal tax liability?
Reduce the tax liability, but cannot reduce it below 0 and result in a refund
Non refundable personal tax credits include:
Child dependent care credit
Elderly and permanently disabled credit
Education credits (lifetime learning and American opportunity)
Retirement savings contribution credit
Foreign tax credit
General business credit
Adoption credit
Refundable tax credits do what to the personal tax liability?
Reduces the tax liability (even below 0) and can result in a refund
Refundable credits include:
Child tax credit (refund is limited)
Earned income credit
Federal income tax withheld (form W-2)
Excess social security tax paid
American opportunity credit (40% refundable)
The child dependent care credit includes what percentage of work related expenses to care for a qualifying person? What is the maximum allowable expenses?
20 - 35% with a maximum of $3,000 per person ($6,000 if 2 or more)
20% if AGI greater than 43,000
35% if AGI less than 15,000
What is NOT an eligible expense to include as an expense in the child and dependent care credit?
Elementary school expenses
Do both parents have to work in order to qualify for the child and dependent care credit?
Yes
How would one calculate the amount that is eligible for the child and dependent care credit?
It is the lesser of:
1. Earned income of the lesser earning spouse
2. Actual expenses incurred
3. The maximum allowable amount (3,000 or 6,000 depending on number of children)
A widow has 2 children. Her AGI is $50,000. Child care for the children costs 3,600 and 3,800 per child. What is the amount of the child and dependent care credit for this taxpayer?
3,600 + 3,800 = 7,400
7,400 > 6,000 max allowed
6,000 X 20% = 1,200 is the amount of the credit
What are the factors for individuals to qualify for the credit for elderly and/or permanently disabled?
They must be 65 years or older
OR
Total and permanently disabled
What are the base amounts used to figure out the credit fr the elderly and/or permanently disabled?
$5,000 for single
$5,000 for MFJ and one spouse qualifies
$7,500 for MFJ and both qualify
$3,750 for MFS
How does a taxpayer calculate the credit for the elderly and/or permanently disabled if they are single, MFJ, and MFS?
Single: [(5,000 - Social Security) - (.5 X amount over 7,500)] X 15%
MFJ: [(7,500 - Social security) - (.5 X amount over 10,000)] X 15%
MFS: [(3,750 - social security) - (.5 X amount over 5,000)] X 15%
Peter I single and 68 years old. He received the following income during the year:
Social security = 3,120
Taxable interest = 215
Taxable retirement distributions = 3,600
Wages from a part-time job = 4,245
Calculate Peter’s credit for the elderly and/or permanently disabled.
Taxable income = 215 + 3,600 + 4,245 = 8,060
5,000 - 3,120 (SS) = 1,880
8,060 - 7,500 = 560 X .5 = 280
1,880 - 280 = 1,600
1,600 X 15% = 240 credit amount
This credit is available against federal income taxes for qualified tuition, fees, and course materials (including books) paid for a student’s first four years of college.
American opportunity tax credit (AOTC)
What is the maximum AOTC credit?
The first $2,000 plus 25% of the next $2,0000 = $2,500 per year per student
Does the AOTC credit phase out?
Yes full phase out at $90,000 or $180,000 if MFJ
This credit is available for an unlimited number of years for qualified tuition and related courses and fees at eligible financial institutions.
Lifetime learning credit (LLC)
What is the maximum amount of credit available for the LLC credit?
20% of qualified expenses up to $10,000 = $2,000 max credit per TAXPAYER (so a $2,000 total regardless of number of students)
Does the LLC credit phase out?
Yes phases out when modified AGI = $90,000 or $180,000 if MFJ
Can a taxpayer use both the lifetime learning credit and the American opportunity credit?
Yes
What is the maximum credit amount allowed for the adoption credit? What happens to the excess of expenses over that credit?
$14,890
Carried forward up to 5 years
Does the adoption credit phase out?
Yes, completely phased out when modified AGI = $263,410
What does not qualify as eligible expenses for the adoption credit?
The credit is not available for adopting a child of a spouse or through surrogacy
Medical expenses do not qualify
What is the maximum contribution amount for the retirement savings contribution credit?
Max contribution is $2,000 per taxayer
Who is eligible for the retirement savings contribution credit?
Taxpayers who are:
At least 18
Not a full time student
Not a dependent of another taxpayer
What is the % amount of the retirement savings contribution credit?
10%, 20%, or 50% of the taxpayer’s contribution to a qualified retirement plan for the year (as income increases, the credit amount decreases)
There is no limit on the foreign tax credit, however they are limited to:
The lesser of:
Foreign taxes paid
OR
(Taxable income from foreign operations / total taxable worldwide income) X U.S. tax
What happens to the excess of foreign tax credit that is not taken?
Carrybacks 1 year and carry forward 10 years
Calculate the general business credit based on the following facts:
Tax = 225,000
Credit = 225,000
225,000 - 25,000 = 200,000 (excess over 25,000 tax liability)
200,000 X 25% = 50,000 (not allowed)
225,000 - 50,000 = 175,000 credit amount
What happens to the unused portion of the general business credit?
May be carried back one year and forward 20 years
The work opportunity credit is available to employers who hire employees from what qualified groups?
Disabled
18 - 24 and from poor families
Vietnam veterans
Food stamp recipients
What is the credit amount for employers who qualify for the work opportunity credit?
40% of the first $6,000 of the first year wages
40% of the first $3,000 to certain summer youth
What is the amount a taxpayer may claim for the child tax credit?
$2,000 for each qualifying child
To qualify for the earned income credit, the taxpayer must:
- Live in the U.S. more than half the year
- Meet certain earned low income thresholds
- Be over 25 and under 65
- File a joint return with their spouse (spouse cannot be dependent)
(The lower the income, the bigger the credit)
What is included in earned income?
Wages
Salaries
Tips
Other employee compensation
Earnings from self-employment
Does NOT include pension and annuity income
Is earned income credit refundable or non refundable credit?
REFUNDABLE
Karen is 26 with gross income of $12,000. Calculate the amount of earned income credit Karen can take.
7,320 (max income eligible) X 7.65% = 560 max credit amount
12,000 - 9,16 (phase out threshold) = 2,840
2,840 X 7.65% = 217 phase out amount
560 - 217 = 343 credit amount
An employee who has had social security tax withheld in an amount greater than the maximum and has two or more employers may do what?
May claim the excess as a credit against income tax
An employee who has had social security tax withheld in an amount greater than the maximum and has one employer may do what?
The employer must refund the excess to the employee. No credit is allowed
The small employer retirement plan start-up costs credit is available for:
The first three years of the plan for employers who have no more than 10 employees who received at least $5,000 in compensation AND at least one plan participant is a non-highly compensated employee
What amount is available for the small employer retirement plan start-up costs credit?
The credit is the greater of:
50% of the first $1,000
OR
The lesser of:
$250 per employee
OR
$5,000
Alice started a SEP IRA for her business that includes 2 other employees. The eligible start-up costs were $1,200. Alice is not a highly compensated employee. Calculate the amount of Alice’s small employer retirement plan start-up costs credit.
1,000 X 50% = 500
250 X 3 employees = 750 < 5,000
500 < 750, therefore the credit amount is 750.
What amount is available for the small business health care tax credit?
Up to 50% of the employer’s costs of the plan premiums provided the employer contributes at least 50% of the costs
What is the amount available for the residential energy credit?
Up to 26% of qualifying solar electric or solar after heating property installed
Tax payments include:
Taxes withheld rom paychecks
Estimated taxes paid
Excess social security tax withheld
A taxpayer is required to make estimated quarterly tax payments if both are met:
- The amount of taxes owed is expected to be more than $1,000
- If the taxpayers withholding is less than the lesser of:
- 90% of current years tax
Or
- 100% of last years tax (110% if AGI is greater than 150,000)
If the taxpayer does not make proper quarterly estimated payments, what happens?
A penalty may be assessed UNLESS the balance of tax owed is under $1,000
What is the employer and employee allowed to do/take for self-employment taxes?
Employer - adjustment
Employee - nothing
An additional Medicare tax of .9% is imposed on wages in excess of:
$250,000 if MFJ
$125,000 if MFS
$200,000 for all others
Investment income includes:
Interest, dividends, capital gains, rental and royalty income, non qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxayer
The net investment income tax does what?
Applies a rate of 3.8% to certain net investment income individuals who have income above $250,000 (MFJ), $200,000 (single or HOH)
What tax requires the net unearned income of a dependent child under 18 or a child who is 18-24 but does not provide over half of his/her own support and is a full time student to be taxed at their parents rate?
The kiddie tax
What amount requires the dependent child’s unearned income to be taxed according to the kiddie tax (at their parents rate)?
If 2,301 or over, taxed at parents rate
