2.3 - Tax Computations & Credits

Question 1

The ordinary income tax rates for individuals are what percentages (increase as income increases):

Answer 1

10, 12, 22, 24, 32, 35, and 37

Question 2

Long term capital gains and qualified dividends are taxed at:

Answer 2

Preferential income tax rates
(0%, 10%, or 20% increasing as income increases)

Question 3

With what structure does the marginal tax rate increase as taxable income increases?

Answer 3

Progressive tax structure

Question 4

Tax credits reduce what?

Answer 4

Personal tax liability

Question 5

What are the two basic types of tax credits?

Answer 5

Non refundable personal tax credits
Refundable credits

Question 6

Non refundable personal tax credits do what to the personal tax liability?

Answer 6

Reduce the tax liability, but cannot reduce it below 0 and result in a refund

Question 7

Non refundable personal tax credits include:

Answer 7

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

Question 8

Refundable tax credits do what to the personal tax liability?

Answer 8

Reduces the tax liability (even below 0) and can result in a refund

Question 9

Refundable credits include:

Answer 9

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)

Question 10

The child dependent care credit includes what percentage of work related expenses to care for a qualifying person? What is the maximum allowable expenses?

Answer 10

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

Question 11

What is NOT an eligible expense to include as an expense in the child and dependent care credit?

Answer 11

Elementary school expenses

Question 12

Do both parents have to work in order to qualify for the child and dependent care credit?

Answer 12

Yes

Question 13

How would one calculate the amount that is eligible for the child and dependent care credit?

Answer 13

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)

Question 14

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?

Answer 14

3,600 + 3,800 = 7,400
7,400 > 6,000 max allowed

6,000 X 20% = 1,200 is the amount of the credit

Question 15

What are the factors for individuals to qualify for the credit for elderly and/or permanently disabled?

Answer 15

They must be 65 years or older
OR
Total and permanently disabled

Question 16

What are the base amounts used to figure out the credit fr the elderly and/or permanently disabled?

Answer 16

$5,000 for single
$5,000 for MFJ and one spouse qualifies
$7,500 for MFJ and both qualify
$3,750 for MFS

Question 17

How does a taxpayer calculate the credit for the elderly and/or permanently disabled if they are single, MFJ, and MFS?

Answer 17

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%

Question 18

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.

Answer 18

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

Question 19

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.

Answer 19

American opportunity tax credit (AOTC)

Question 20

What is the maximum AOTC credit?

Answer 20

The first $2,000 plus 25% of the next $2,0000 = $2,500 per year per student

Question 21

Does the AOTC credit phase out?

Answer 21

Yes full phase out at $90,000 or $180,000 if MFJ

Question 22

This credit is available for an unlimited number of years for qualified tuition and related courses and fees at eligible financial institutions.

Answer 22

Lifetime learning credit (LLC)

Question 23

What is the maximum amount of credit available for the LLC credit?

Answer 23

20% of qualified expenses up to $10,000 = $2,000 max credit per TAXPAYER (so a $2,000 total regardless of number of students)

Question 24

Does the LLC credit phase out?

Answer 24

Yes phases out when modified AGI = $90,000 or $180,000 if MFJ

Question 25

Can a taxpayer use both the lifetime learning credit and the American opportunity credit?

Answer 25

Yes

Question 26

What is the maximum credit amount allowed for the adoption credit? What happens to the excess of expenses over that credit?

Answer 26

$14,890
Carried forward up to 5 years

Question 27

Does the adoption credit phase out?

Answer 27

Yes, completely phased out when modified AGI = $263,410

Question 28

What does not qualify as eligible expenses for the adoption credit?

Answer 28

The credit is not available for adopting a child of a spouse or through surrogacy
Medical expenses do not qualify

Question 29

What is the maximum contribution amount for the retirement savings contribution credit?

Answer 29

Max contribution is $2,000 per taxayer

Question 30

Who is eligible for the retirement savings contribution credit?

Answer 30

Taxpayers who are:
At least 18
Not a full time student
Not a dependent of another taxpayer

Question 31

What is the % amount of the retirement savings contribution credit?

Answer 31

10%, 20%, or 50% of the taxpayer’s contribution to a qualified retirement plan for the year (as income increases, the credit amount decreases)

Question 32

There is no limit on the foreign tax credit, however they are limited to:

Answer 32

The lesser of:
Foreign taxes paid
OR
(Taxable income from foreign operations / total taxable worldwide income) X U.S. tax

Question 33

What happens to the excess of foreign tax credit that is not taken?

Answer 33

Carrybacks 1 year and carry forward 10 years

Question 34

Calculate the general business credit based on the following facts:
Tax = 225,000
Credit = 225,000

Answer 34

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

Question 35

What happens to the unused portion of the general business credit?

Answer 35

May be carried back one year and forward 20 years

Question 36

The work opportunity credit is available to employers who hire employees from what qualified groups?

Answer 36

Disabled
18 - 24 and from poor families
Vietnam veterans
Food stamp recipients

Question 37

What is the credit amount for employers who qualify for the work opportunity credit?

Answer 37

40% of the first $6,000 of the first year wages
40% of the first $3,000 to certain summer youth

Question 38

What is the amount a taxpayer may claim for the child tax credit?

Answer 38

$2,000 for each qualifying child

Question 39

To qualify for the earned income credit, the taxpayer must:

Answer 39

1. Live in the U.S. more than half the year
2. Meet certain earned low income thresholds
3. Be over 25 and under 65
4. File a joint return with their spouse (spouse cannot be dependent)

(The lower the income, the bigger the credit)

Question 40

What is included in earned income?

Answer 40

Wages
Salaries
Tips
Other employee compensation
Earnings from self-employment

Does NOT include pension and annuity income

Question 41

Is earned income credit refundable or non refundable credit?

Answer 41

REFUNDABLE

Question 42

Karen is 26 with gross income of $12,000. Calculate the amount of earned income credit Karen can take.

Answer 42

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

Question 43

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?

Answer 43

May claim the excess as a credit against income tax

Question 44

An employee who has had social security tax withheld in an amount greater than the maximum and has one employer may do what?

Answer 44

The employer must refund the excess to the employee. No credit is allowed

Question 45

The small employer retirement plan start-up costs credit is available for:

Answer 45

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

Question 46

What amount is available for the small employer retirement plan start-up costs credit?

Answer 46

The credit is the greater of:
50% of the first $1,000
OR
The lesser of:
$250 per employee
OR
$5,000

Question 47

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.

Answer 47

1,000 X 50% = 500

250 X 3 employees = 750 < 5,000

500 < 750, therefore the credit amount is 750.

Question 48

What amount is available for the small business health care tax credit?

Answer 48

Up to 50% of the employer’s costs of the plan premiums provided the employer contributes at least 50% of the costs

Question 49

What is the amount available for the residential energy credit?

Answer 49

Up to 26% of qualifying solar electric or solar after heating property installed

Question 50

Tax payments include:

Answer 50

Taxes withheld rom paychecks
Estimated taxes paid
Excess social security tax withheld

Question 51

A taxpayer is required to make estimated quarterly tax payments if both are met:

Answer 51

1. The amount of taxes owed is expected to be more than $1,000
2. 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)

Question 52

If the taxpayer does not make proper quarterly estimated payments, what happens?

Answer 52

A penalty may be assessed UNLESS the balance of tax owed is under $1,000

Question 53

What is the employer and employee allowed to do/take for self-employment taxes?

Answer 53

Employer - adjustment
Employee - nothing

Question 54

An additional Medicare tax of .9% is imposed on wages in excess of:

Answer 54

$250,000 if MFJ
$125,000 if MFS
$200,000 for all others

Question 55

Investment income includes:

Answer 55

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

Question 56

The net investment income tax does what?

Answer 56

Applies a rate of 3.8% to certain net investment income individuals who have income above $250,000 (MFJ), $200,000 (single or HOH)

Question 57

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?

Answer 57

The kiddie tax

Question 58

What amount requires the dependent child’s unearned income to be taxed according to the kiddie tax (at their parents rate)?

Answer 58

If 2,301 or over, taxed at parents rate