Bryant - Course 4. Tax Planning. 3. Income Tax Calculations Flashcards

Question

How do you meet the relationship test to claim a dependent?

Answer 1

**To be claimed as a dependent, a person must either be related to the taxpayer or reside with the taxpayer for the entire tax year. ** Both immediate family and extended family relationships meet this test. Immediate family relationships include those based on blood, adoption, or marriage, and extended family relationships include only those based on blood or adoption. On a joint return, the dependent needs to be related to only one spouse. Once established, an immediate family relationship is not terminated by death or divorce.

Answer 2

* Grandparents and their ancestors * Grandchildren and their descendants * Aunts and uncles * Nephews and nieces

Answer 3

A qualifying child must have the same principal abode as the taxpayer for more than half of the year. A noncustodial parent meets this requirement if the custodial parent agrees in writing.

Answer 4

They are: * Support Test: The taxpayer provides over 50% of the dependent's support. * Joint Return Test: A taxpayer may not claim a dependency exemption for a married dependent who files a joint return. * Relationship Test: A dependent is related to the taxpayer or resides with the taxpayer for the entire tax year. * Citizenship Test: Dependent must be a U.S. citizen, national or resident, or be a resident of Canada or Mexico.

Answer 5

False Only Simon's parents may claim him as a dependent because the gross income test is waived and all other tests are met. Even though Simon earned more than the standard deduction amount of $13,850 (2023), he would not be able to claim himself as a dependent on his return. One of the critical details of this test is that the dependent must be a child of the taxpayer. Thus, if Simon's aunt and uncle support him (rather than his parents), the aunt and uncle could not claim Simon because the gross income test is not met.

Answer 6

Decided by special rules set by Congress In case of divorce or separation special rules determine which parent will receive child tax credits for children. Congress sets these rules. This is done to avoid disputes between the parents.

Answer 7

Standard Deduction When you calculate your client's itemized deduction, it is less than the standard deduction, and you would utilize the standard deduction. Medical expenses are allowed only in the amount greater than 7.5% of AGI. $74,320 x 0.075 = $5,574. Since there were only $5,300 of medical expenses, the client's costs do not exceed 7.5% of AGI, and, as a result, no medical expense deduction is allowed. The remaining expenditures of $4,900 + $5,500 = $10,400 in itemized deductions. Because the standard deduction is greater ($13,850 in 2023), it would be used when filing the client's taxes.

Answer 8

* 10% * 12% * 22% * 24% * 32% * 35% * 37%

Answer 9

There are five different filing statuses but only four rate schedules and/or tax tables, because married couples filing jointly and certain surviving spouses use the same rate schedule or tax table. The five statuses are: 1. Married filing jointly / Surviving spouse 2. Head of household 3. Single (now being referred to as "unmarried") 4. Married filing separately

Answer 10

1. They must be legally married as of the last day of the tax year. Whether a couple is married depends on the laws of the state of residence. Couples in the process of divorce are still considered married until the date the divorce becomes final. **A couple need not be living together in order to file a joint return**. A joint return can be filed if one spouse dies during the year as long as the survivor does not remarry before year-end. The executor of the estate must agree to the filing of a joint return. 2. They must have the same tax year-end (except in case of death). 3. Both spouses must be U.S. citizens or residents. An exception allows a joint return if the nonresident alien spouse agrees to report all of his or her income on the return.

Answer 11

A widow or widower can file a joint return for the year his or her spouse dies if the widow or widower does not remarry. For the two years after the year of the death, the widow or widower can file as a surviving spouse only if he or she meets specific conditions. The surviving spouse (sometimes called a qualifying widow or widower) must: * Have not remarried as of the year-end in which surviving spouse status is claimed. * Be a U.S. citizen or resident. * Have qualified to file a joint return in the year of death. * **Have at least one dependent child living at home during the entire year, and the taxpayer must pay over half of the expenses of the home**.

Answer 12

A surviving spouse must not remarry as of the year end in which surviving spouse status is claimed to qualify for surviving spouse status.

Answer 13

1. Be unmarried as of the last day of the tax year. Exceptions apply to individuals married to nonresident aliens and to abandoned spouses. An individual cannot claim head-of-household status in the year that his or her spouse died. Such individuals must file a joint return or a separate return. 2. Not be a surviving spouse. 3. Be a U.S. citizen or resident. 4. **Pay over half the costs of maintaining his or her home as a household in which a dependent relative lives for more than half the tax year.** The dependent exemption cannot be based on a multiple support agreement. There are two special rules. First, a taxpayer with a dependent parent qualifies even if the parent does not live with the taxpayer. Second, an unmarried descendant who lives with the taxpayer need not be the taxpayer's dependent.

Answer 14

If Ellen maintains the home in which she and the child live, she can claim head-of-household status even though the child is Brad's dependent.

Answer 15

To qualify for the credit, an individual must meet two requirements: 1. Child or dependent care expenses must be incurred to enable the taxpayer to be gainfully employed, and 2. The taxpayer must maintain a household for a dependent under 13 or an incapacitated dependent or spouse.

Answer 16

The credit is **35% of the qualifying expenses **(after the ceiling limitations of $3,000 - individual or $6,000 - family have been applied). However, the **credit rate is reduced by one percentage point for each $2,000 (or fraction thereof) of adjusted gross income (AGI) in excess of $15,000 but goes no lower than 20%**. **The minimum tax credit (20%) is applied once a taxpayer's AGI exceeds $45,000 (2023).**

Answer 17

A limited, personal, non-refundable credit is provided for certain low-income elderly individuals who have attained the age of 65 before the end of the tax year and individuals who retired because of a permanent and total disability and who receive insubstantial Social Security benefits. Most elderly taxpayers are ineligible for the credit because they receive Social Security benefits in excess of the ceiling limit or they have AGI amounts in excess of the limitations, which effectively reduce or eliminate the allowable tax credit.

Answer 18

A **nonrefundable** credit is allowed for qualified adoption expenses. **The credit in 2023 is limited to a maximum of $15,950 (including a child with special needs) and generally is allowable in the year the adoption is finalized**. However, if the adoption expenses are paid or incurred in a year after the year the adoption is finalized, the credit is allowable in such later year. If adoption expenses are paid before the year the adoption is finalized, such expenses are deductible in the year the adoption is finalized. Further, there is a phase-out of the credit based on AGI. **For taxpayers with AGI in 2023 between $239,230 and $279,230, the credit is incrementally phased out and is fully phased out when a taxpayer's AGI reaches $279,230.** **Taxpayers adopting a special needs child are treated as having incurred qualified adoption expenses of $15,950, even if actual expenses are less.**

Answer 19

The 2023 Child Tax Credit is available to parents with dependents under the age of 17 at the end of the year and who meet certain eligibility requirements. **Taxpayers with eligible children can claim a credit worth up to $2,000 per child**. This year the credit is** partially refundable,** and there is an **earnings threshold to be able to start claiming the up to $1,500 portion known as the Additional Child Tax Credit.** Taxpayers who owe less in taxes than the refundable amount will have it added to their tax refund, the non-refundable portion will reduce taxes owed dollar-for-dollar.

Answer 20

Parents of eligible children must have an adjusted gross income (AGI) of less than $200,000 for single filers and $400,000 for married filing jointly to claim the full credit. For every $1,000, or fraction thereof, in excess of those thresholds, the credit is reduced by $50.

Answer 21

$2,000 Because their AGI does not exceed $400,000, they received the full child tax credit of $2,000 for a child under 17 at the end of 2023.

Answer 22

Taxpayers are allowed up to a **$2,500 credit for tuition and related expenses paid during the taxable year for each qualified student**. Qualified tuition and related expenses include only tuition and fees required for enrollment and course materials such as textbooks. Qualifying expenses do not include room and board, student activity fees, and other expenses unrelated to an individual’s academic course of instruction. The AOTC applies to each student. Thus, parents with two children in their first four years of college may claim up to $2,500 credit for each child.

Answer 23

There are several requirements and limitations that exist for AOTC credits: * The $2,500 credit is allowed for a **maximum of four years per student** and is computed by taking **100% of the first $2,000 of tuition and fees plus 25% of the second $2,000 in tuition and fees**. * If a taxpayer pays qualified education expenses in one year, but the expenses relate to an academic period that begins during January, February, or March of the next taxable year, the academic period is treated as beginning during the taxable year in which the payment is made. * An eligible **student must carry at least half (1/2) of the normal full-time load for the course of study that the student is pursuing**. * The AOTC credit is **not available to any student convicted of a federal or state felony offense for possession or distribution of a controlled substance **as of the end of the taxable year for which the credit is claimed. * Qualified tuition and related expenses eligible for the credit must be reduced by amounts received under other sections of the tax law. * The allowable credit (including both the AOTC and the lifetime learning credit) is reduced for taxpayers who have modified AGI above certain amounts. **The phase-out for taxpayers filing joint returns in 2023 is $160,000 to $180,000 ($80,000 to $90,000 for other taxpayers).**

Answer 24

The Lifetime Learning Credit is computed differently from the AOTC and is less restrictive, although most of the definitions regarding eligible students and qualified expenses are identical to the AOTC. **The credit is 20% of a maximum of $10,000 per year of qualified tuition and fees paid by the taxpayer for one or more eligible students. ** However, unlike the AOTC, the $10,000 limitation is **imposed at the taxpayer level, not on a per-student basis**.

Answer 25

Below are some important requirements for the lifetime learning credit: * The definition of qualified tuition and related expenses are the same as for the AOTC. * The lifetime learning credit is **available for unlimited years and may be used for undergraduate, graduate, and professional degree expenses**. * The maximum amount of expenses eligible for the credit is $10,000. * The lifetime learning credit and AOTC may not be taken in the same tax year with respect to the same student’s tuition and related expenses. * The lifetime learning credit** may be claimed for any course (degree or non-degree) at a college or university that helps an individual acquire or improve his or her job skills, such as credit or noncredit courses that qualify as continuing professional education (CPE)**. * The lifetime learning credit spans over a $20,000 range for taxpayers filing joint returns with **modified AGI ranging from $160,000 to $180,000 (2023). The phaseout for all other taxpayers is a $10,000 range with modified AGI phaseout ranging from $80,000 - $90,000 (2023)**.

Answer 26

No. Cannot claim benefit if someone else can claim you as a dependent on their return.

Answer 27

American Opportunity Tax Credit (AOTC) - Up to $2,500 credit per eligible student Lifetime Learning Credit - Up to $2,000 credit per return

Answer 28

Schedule 3 of Form 1040 Form 8863, Education Credits

Answer 29

To encourage low and middle-income taxpayers to save for retirement, a **permanent, nonrefundable credit for contributions or deferrals to qualified retirement plans has been established for tax years beginning after December 31, 2001**. (Sec. 25B. The Pension Protection Act of 2006 made the credit permanent.) The saver's credit is **allowed in addition to otherwise allowable exclusions or deductions from gross income for retirement plan contributions or deferrals**. To be eligible for the saver's credit, a taxpayer must be at least 18 years of age as of the close of the tax year, must not be claimed as a dependent on someone else's tax return, and must not be a full-time student as defined in Sec. 152(f)(2) for purposes of the dependency exemption (full-time student for at least 5 calendar months).

Answer 30

The saver's credit is computed by **multiplying the amount contributed (maximum $2,000 per eligible individual per year) by an applicable percentage**. The percentage for 2023 depends on the taxpayer's adjusted gross income, as shown in the following table: 0%, 10%, 20%, 50% depending on filing status and income

Answer 31

U.S. citizens, resident aliens and U.S. corporations are subject to U.S. taxation on their worldwide income. **To reduce double taxation, the tax law provides a foreign tax credit for income taxes paid or accrued to a foreign country or a U.S. possession**. Taxpayers may elect to take a deduction for the taxes paid or accrued in lieu of a foreign tax credit. **In general, the foreign tax credit results in a greater tax benefit because a credit fully offsets tax liability, while a deduction merely reduces taxable income.**

Answer 32

The Earned Income Credit is **refundable**. It is similar to a welfare benefit for certain low-income families. The credit is** based on earned income that includes wages, salaries, tips, and other employee compensation plus net earnings from self-employment and is designed to encourage low-income individuals to become gainfully employed**. The **credit is available to individuals with qualifying children and to certain individuals without children if the earned income and AGI thresholds are met**. The earned income credit **applies to married individuals only if a joint return is filed**.

Answer 33

1. The individual’s principal residence is in the United States for more than one-half of the tax year. 2. The individual (or spouse if married) is at least age 25 and not more than age 64 at the end of the tax year. 3. The individual is not a dependent of another taxpayer for the tax year.

Answer 34

0 children Max Earned Income Credit? $600 Max earnings for Single or HoH filers? $17,640 Max earnings for MFJ? $24,210

Answer 35

1 child Max Earned Income Credit? $3,995 Max earnings for Single or HoH filers? $46,560 Max earnings for MFJ? $53,120

Answer 36

2 children Max Earned Income Credit? $6,604 Max earnings for Single or HoH filers? $52,918 Max earnings for MFJ? $59,478

Answer 37

3 children Max Earned Income Credit? $7,430 Max earnings for Single or HoH filers? $56,838 Max earnings for MFJ? $63,398

Answer 38

Backup withholding was implemented to prevent abusive noncompliance with tax provisions. Backup withholding provides for withholding of taxes from pension income. It also requires withholding on most payments reported on Form 1099, such as: interest, dividends, and royalties under certain circumstances (e.g., where the taxpayer fails to provide the payor with a tax identification number, or fails to report this type of income on the tax return).

Answer 39

The Kiddie Tax is computed by **applying the parent's highest marginal tax rate to the child's net unearned income**. The child's taxable income attributable to earned income is taxed according to a single taxpayer's bracket.

Answer 40

Under the Kiddie Tax rules, **children who are subject to the kiddie tax are taxed at a higher rate than would otherwise apply on their "unearned income" (i.e., dividends, interest, capital gains) that exceeds twice the standard deduction allowed to dependents (or, $2,500)**. The Kiddie Tax applies regardless of whether the child may be claimed as a dependent by either or both parents. For children over age 17, the Kiddie Tax applies only to children whose earned income doesn't exceed one-half of the amount of their support. The Kiddie Tax is computed on Form 8615.

Answer 41

The net unearned income of a child is subject to the Kiddie Tax if: 1. the child is under age 19 by the end of the tax year or is a full-time student under age 24; 2. the child has at least one living parent by the end of the tax year; 3. the child's unearned income is more than twice the minimum standard deduction allowed to dependents; and 4. the child doesn't file a joint return

Answer 42

In addition to income taxes, self-employed individuals are also responsible for paying both the employee and the employer contributions of Social Security and Medicare tax. These taxes are known as self-employment taxes, and any self-employment net income over $400 is subject to this tax. The Social Security or old age and disability component (OASDI) of these taxes is 12.4% and for 2023, is capped on $160,200 of self-employment income. The 12.4% is composed of 6.2% for the employer portion and 6.2% for the employee portion. The Medicare tax rate is 2.9%, (1.45% for each employee and employer portion) and is applied to the entire amount of self-employment income less an adjustment of 7.65% (Shown below as X 0.9235). Additionally, all general partners of either a general partnership or an LLC are also subject to this tax. This tax is imposed on all guaranteed payments and pass-through of income.

Answer 43

The Social Security or old age and disability component (OASDI) of these taxes is **12.4% and for 2023, is capped on $160,200 of self-employment income. ** The 12.4% is composed of 6.2% for the employer portion and 6.2% for the employee portion.

Answer 44

The Medicare tax rate is **2.9%, (1.45% for each employee and employer portion) and is applied to the entire amount of self-employment income less an adjustment of 7.65% (Shown below as X 0.9235)**.

Answer 45

For example, net earnings from self-employment are $160,200. SE earnings X 0.9235 X 0.153 = SE taxes due. 7.65% (the employer portion) is a deduction for AGI. $160,200 x 0.9235 = $147,944.70 X 0.153 = $22,635.54.

Answer 46

For example, net earnings of $175,000 $175,000 (net SE earnings) X 0.9235 X 0.029 = $4,686.76 (Medicare tax) $160,200 (earnings up to Social Security wage base) X 0.9235 X 0.124 = $18,345.14 (OASDI tax) Add steps 1 and 2 for total SE tax due = $23,031.90. The employer portion, 7.65%, is a deduction for AGI.

Answer 47

Under the 2010 Patient Protection and Affordable Care Act, P.L. 111-148, beginning in 2013, **individuals must pay an additional 0.9% Medicare tax on earned income above certain thresholds ($200,000 Individual, $250,000 Married Couples). This tax applies to both wage income and self-employment (SE) income. **

Answer 48

The Net Investment Income Tax (NIIT) is imposed by IRC Section 1411. **Individuals, estates, and trusts are subject to a 3.8% surtax on net investment income ** Tax applies to the lesser of: * Net Investment Income (NII) or * the excess of modified AGI over $250k for MFJ ($200k; Single)

Answer 49

For 2023, the couple will have to pay a 3.8% unearned income surtax on the lesser of their: * $25,000 of net investment income, or * $50,000 ($300,000 - $250,000) MAGI in excess of the $250,000 threshold for married taxpayers filing jointly. As a result, the couple will pay a $950 (0.038 x $25,000) net unearned income surtax in 2023.

Answer 50

Married filing jointly Married filing separately For the tax year 2023, Monica can file a joint return, even though her husband died before year-end. Alternatively, Monica can file as a married individual filing a separate return. **In 2024, however, Monica must file as a single taxpayer since she has no dependent children who would qualify her as a surviving spouse or head of household.**

Answer 51

False A limited, personal, nonrefundable credit is provided for certain low-income elderly individuals who have attained age 65 before the end of the tax year. It is also applicable to individuals who retired because of a permanent and total disability and who receive insubstantial Social Security benefits.

Answer 52

Gross Pay Bill's filing status The information Bill gives to the employer on Form W-4 Gross income has no bearing on the amount that an employer should withold, as gross income includes income from sources other than salary.

Answer 53

$14,130 The first step is to determine if the SE earnings X 0.9235 plus the W-2 wages exceed $160,200 (2022). Because the result, [($100,000 x 0.9235) + $40,000 (W-2 income) = $132,350], is less than the maximum Social Security wage base of $160,200, Jane's net earnings from self-employment, $92,350, are subject to 15.3% SE tax. ($100,000 x 0.9235 x 0.153 = $14,130).

Answer 54

Both I and II The gross income test is waived for a child of the taxpayer who is either under the age of 19 or, if a full-time student, under the age of 24.

Answer 55

by the end of the calendar year A joint return may be filed if a couple is married by the end of the calendar year.

Answer 56

$720 A $3,000 deduction for a taxpayer in the 24% marginal tax bracket reduces taxes by $720. $3,000 (deduction) x 0.24 (marginal rate) = $720

Answer 57

married filing jointly A widow or widower can file a joint return for the year his or her spouse dies if the widow or widower does not remarry. For the two years after the year of the death, the widow or widower can file as a surviving spouse (i.e., qualifying widow(er) only if he or she meets specific conditions.

Answer 58

To claim a dependency exemption for an individual who is considered a qualifying child, the following additional requirements must be met: A relationship test An age test An abode test A support test

Answer 59

above-the-line deductions Deductions for adjusted gross income are also referred to as above-the-line deductions.

Answer 60

Individuals over 65 and blind qualify for the standard deduction. The standard deduction is unavailable to three categories of taxpayers: * An individual filing a return for a period less than twelve months because of a change in an accounting period. * A married taxpayer filing a separate return in instances where the other spouse itemizes. * Non-resident aliens.

Answer 61

exclusions An exclusion is a source of income that is omitted from the tax base, whereas a deduction is an expense that is subtracted in arriving at taxable income. Child support is categorized as an exclusion.

Answer 62

7.5% If a taxpayer itemizes, medical expenses over 7.5% of AGI are deductible.

Answer 63

gross income Income from whatever source derived – exclusions = gross income.