Adjustments and Itemized Deductions

Question 1

Adjustments for AGI

Answer 1

Educator Expenses
IRA
Student Loan Interest Expenses
Health Savings Account
Moving Expenses
One Half Self Employment FICA
Self Employed Health Insurance
Self Employed Retirement
Interest Withdrawal Penalty
Alimony Paid
Attorney Fees Paid in Certain Discrimination and Whistle-blower Cases
Domestic Production Activities Deduction

Question 2

IRAs

Answer 2

1) Earnings accumulate tax-free
2) Withdrawals from deductible IRAs are taxable as ordinary income an may be subject to applicable penalties.
3) Deductibility Requirements
Phase Out 92K-112K Joint, Single 58K-68K
4) Can Deduct the lesser of $5,000 or the individuals compensation

Question 3

Roth IRA

Answer 3

1) Non-deductible when made
2) Earnings accumulate tax-free while in a Roth IRA account.
3) Distributions of both principal and interest, are also tax-free provided they are qualified distributions
4) Contribution Limits- 5K for single, 10K for married

Phase Out Limits
Single with MAGI between 110K to 125K
Joint Filers with MAGI between $173K to 183K
Married filing separate with MAGI 0 to 10K

Question 4

Coverdell Education Savings Accounts

Answer 4

1) Contributions are non-deductible, maximum contribution per beneficiary is $2,000.
2) Tax-Free Earnings
3) Tax Free Distributions for qualified Education Expenses with a limit of 30 years
4) $2,000 per year

Question 5

Investment Interest Expense

Answer 5

Limited to Net Taxable investment income.

Question 6

Charitable Contributions

Answer 6

Maximum allowable deduction:
Cash-50% of adjusted gross income
FMV Property= 30% of AGI for gifts of long term capital gain property to public charities.

Question 7

Causualty and Theft Losses

Answer 7

Causualty and theft losses of nonbusiness property are deductible to the extent that each individual loss exceeds $100 and that the aggregate of these excess losses (excess over $100) exceeds 10% of AGI. The $100 applies to each separate causualty event.

Question 8

Personal Tax Credits

Answer 8

Personal Tax Credits may reduce personal tax liability to zero, but they may not result in cash refund. Personal tax credits include:

1) Child and dependent care credit
2) Elderly and permanantly disabled credit
3) Education credits
a) Lifttime Learning credit
4) Retirement savings contribution credit
5) Foreign tax credit
6) General business credit

Question 9

Refundable Credits

Answer 9

Refundable credits are substracted from income tax liability. They may result in a cash refund when the credit exceeds tax liability owed if no tax is withheld from wages. The following are refundable credits:

1) Child tax credit
2) Earned Income credit
3) Withholding taxes (W-2)
4) Excess Social Security paid
5) Long Term Unsed Minimium Tax Credit
6) American Opportunity Credit (40% refundable)
7) Adoption Credit

Question 10

Child and Dependent Care Credit

Answer 10

Tax Credit 20% to 35% of eligible expenditures

One dependent-$3K
Two Dependents or more-6K

Eligible People- qualified child under age 13 fo whom an exemption be claimed, any disabled dependent of any age who is unable to care for himself, or a disabled spouse

Married taxpayers must both produce income from wages, salary or net self employment income to be eligible for the child and dependent care credit.

Eligible expentitures- babysitter, nursery school, day care, not grammar school

Credit Computation- Maximium child care credit is 35% must be $15,000 or less, Credit decreases by 1% for each $2,000 of AGI over $15,000 but not below 20%. If more than

Question 11

Credit for the Elderly and DIsabled

Answer 11

Credit of 15% of eligible income is available to individuals who are 65 years of age or older or Under 65 and retired due to permanant disability.

Base amounts- $5K for a single person, $5K married filing jointly and only one spouse qualifies, $7,500 married filing jointly and both are qualified individuals, $3,750 for a qualified individual who is married filing separately.

AGI Limits- Single taxpayers for $7,500, Married persons filing jointly 10,000, married persons filing separately $5,000.

Question 12

American Opportunity Credit

Answer 12

Available against federal income taxes for qualified tuition, fees, and course materials (paid for a student’s first four years of post secondary college.

Maximium credit of $2,500. 100% of the first 2,000 plus 25% of the next 2,000. Phase out begins with Modified AGI exceeding $80,000

Question 13

Lifetime Learning Credit

Answer 13

Equal to 20% of qualified expenses up to $10,000.
Qualified expenses include payments for undergraduate courses, graduate level courses certain professional degree courses and courses to acquire or improve job skills.

Question 14

Adoption Credit

Answer 14

Per child-$13,400

Phase out begins at approximately $201K.

Question 15

Foreign Tax Credit

Answer 15

May claim credit for foreign income taxes paid, limited on foreign

Can be carried back one year and carry forward ten years.

Lesser of foreign taxes paid or

Taxable income from all foreign operations/(taxable income+exemptions)* US Tax=Foreign tax credit limit

Question 16

Work Opportumity Credit

Answer 16

Credit 40% of first $6,000 of first years wages

Credit 40% of first $3,000 to certain summer youth

Question 17

Child Tax Credit

Answer 17

May claim $1,000 tax credit for each qualifying child

Reduce $1,000 for each $50 for joint return with $110K, $75,000 unmarried individual, $55,000 for married individuals filing a separate return.

Refundable to the extent of the lesser of:

1) Excess child tax credit
2) Earned income less $3,000 times 15%

Question 18

Earned Income Credit

Answer 18

Eligible:

1) Live in the US for more than half the taxable year
2) Meet certain earned low-income thresholds
3) Not have more than a specified amount of disqualified income.
4) Be over the age of 25 and less than 65 if there are no qualifying children
5) File a joint return with spouse with certain exceptions

Earned Income is wages, salaries, tips , other employee compensation and earnings from self employment.

Qualifying child is not required, but allows for a higher percentage credit.

Earned Income Credit

1) $503, with no single taxpayer
2) $3,359 with one qualifying child
3) $5,548 with two qualifying children

Cannot claim credit if individual has disqualified income.

Question 19

Alternative Minimium Tax

Answer 19

Tax designed to ensure that taxpayers who take a large number of tax preferenced deductions pay a minimium amount of tax on their income. Alternative minimum tax is the excess of the tentative AMT over the regular tax.

Question 20

Calculation of AMT

Answer 20

Regular Tax Income
\+/-Adjustments
\+Preferences
\_\_\_\_\_\_\_\_\_\_\_\_\_
Alternative Miinimum Taxable Income
 for single and MFS
Alternative Minimum Tax Base
* Tax Computation
Tenative AMT Tax

Tentative Minimum Tax

Alternative Minimum Tax

Question 21

Exemption Amounts

Answer 21

33,750 less 25% (AMTI-$112,500) for single taxpayers, $45,000 less 25% for joint filers and 22,500 less 25% (AMT) for married filing separately

Question 22

Adjustments

Answer 22

PALs
Accelerated Depreciation
Net Operating Loss 
Installment Income of A Dealer
Contracts- percentage completion vs completed contract
Tax "deductions"
Interest deductions on some home equity loans
Medical deductions
Miscellaneous deductions now allowed
Exemptions and standard deduction

Question 23

AMT Credits

Answer 23

Foreign Tax Credit
Adoption Credit
Child Tax Credit
Contributions to retirement plans credit
Earned Income Credit

Question 24

Statute of Limitations

Answer 24

Three years from later of:

Due date of return or
Date return is filed

25% understatement of gross income
Six years from later of due date of return, or
date return is failed