Chapter 14: AMT, SE Tax, Tax Credits, Tax Payments Flashcards
1
Q
Purpose of alternative minimum tax
A
To ensure that all taxpayers would pay at least a minimum amount of income tax
2
Q
Who does the alternative minimum tax apply to
A
Individuals, estates, and trusts
3
Q
Alternative minimum taxable income
A
AMTI =
Taxable income (regular)
+ AMT preference items
+/- AMT adjustments
4
Q
Alternative minimum tax base
A
Alternative minimum taxable income (AMTI)
Minus: AMT exclusion amount
5
Q
Tentative minimum tax
A
Alternative minimum tax base
* AMT tax rates
6
Q
Alternative minimum tax
A
AMT
Tentative minimum tax
Minus: regular income tax
Taxpayers must pay the greater of the regular income tax or TMT (aka must pay regular income tax + any AMT)
7
Q
AMT tax brackets
A
26% on first $199,900 AMTI
28% on AMTI over $199,900
8
Q
AMT exemption up to threshold
A
Exception given up to threshold
MFJ: $114,600 (up to $1,047,200 AMTI)
MFS: $56,300 (up to $523,600 AMTI)
Single or HOH $73,600 ((up to $523,600 AMTI)
9
Q
AMT exception above the threshold
A
= basic exemption amount - 25%(AMTI - threshold)
10
Q
Tax preference items
A
Items that receive regular preferential tax treatment that may be overused
11
Q
Common tax preference items
A
- excess of accelerated depreciation expense over straight line for real property placed in service before 1987 (computed item by item)
- tax exempt interest on “private activity bonds” (state and local bonds issued to help a private business)
- excess of depletion expense over adjusted basis of underlying resource asset (NOT INC. independent oil and gas producers and royalty owners)
12
Q
Categories of AMT adjustments
A
- regular tax itemized deductions disallowed in computing AMTI
- disallowance of the standard deduction (if used)
- timing differences from deferral of income or acceleration of deductions under tax rules
13
Q
Itemized deductions not allowable for AMT
A
- state, local, foreign sales, income, property tax
- home mortgage interest other than qualified housing interest
14
Q
Qualified housing interest
A
Interest on debt incurred to acquire/build/improve taxpayers principal residence or second home
15
Q
Common AMT adjustments for timing
A
- if taxpayer elected out of bonus depreciation for property placed in service between 1999 and 2015
- real property placed in service between 1987 and 1998, the difference between MACRS claimed and hypothetical straight line depreciation
- incentive stock options, exceed of FMV over price paid on date rights are freely transferrable/not subject to substantial risk of forfeiture
- Difference between R&E regular deduction and deduction allowed had expenditures been capitalized and amortized over 15 years
16
Q
What credits may reduce AMT
A
Only foreign tax credit and nonrefundable personal credits
17
Q
Positive AMT adjustment
A
When amounts depreciated etc under AMT are smaller than actual amounts used the difference must be added to income to reach AMTI
18
Q
Minimum tax credit
A
Credit allowed against regular tax liability for AMT paid in past years (if AMT was from amounts that reversed in later year)
If taxpayer paid AMT in a previous year and did not in the current they may be entitled to this credit
19
Q
Total tax liability if subject to AMT
A
= regular tax + AMT
20
Q
Do employees have to report FICA taxes on their income tax
A
No
Reported by the employer
21
Q
Combined FICA rate
A
15.3%
22
Q
FICA tax breakdown
A
12.4% social security tax
2.9% Medicare tax
If self employed must pay full amount
If employee of another: employer pays 1/2 and employee pays 1/2 (withheld from paycheck)
23
Q
Social security ceiling
A
For 2021: $142,800
Wages/earnings above this amount do not accrue 12.4% social security tax
24
Q
Is there a ceiling for medical tax imposed?
A
No. 2.9% Medicare tax imposed on all wages
25
Net earnings from SE
92.35% of self employment income
26
Self employment income which can be made by an individual and not have self employment tax charged
$400
27
Allowable deduction for self employment tax
50%
Deducted to arrive at AGI
28
Calculating SE tax
Self employment income x .9235 = net earnings from SE
(Smaller of net earnings from SE or $142,800) * .124 = social security tax
Net earnings * 0.029 = Medicare tax
Medicare tax + social security tax = FICA tax
FICA tax * .5 = SE tax deduction
29
Self employment tax for individuals who work as an employee and operate a business
Tax base for social security tax = lesser of net earnings from self employment or social security ceiling amount reduced by earnings as an employee
Tax base for Medicare tax is net earnings from self employment
30
Net earnings from self employment
Total self employment income x .9235
31
Hospital insurance tax
Aka additional Medicare tax
0.9% of wages and self employment income for individuals whose income exceeds $200,000 (single), $250,000 (MFJ), $125,009 (MFS)
Threshold amount used first against employee compensation and then against SE income
Only pay the additional tax on the income above the threshold
32
Is additional Medicare tax included in the for AGI self employment tax deduction?
No
33
SE tax for married filing jointly who both have SE income
Must be calculated separately
34
Items included in self employment income
- net earnings from a sole proprietorship
- directors fees
- taxable research grants
- distributive share of partnership income plus guaranteed payments from the partnership
35
Nonrefundable tax credits
Only offset tax liability (so only available to the extent of tax liability)
36
Refundable credits
Excess over tax liability will be paid to the taxpayer
37
Partially refundable tax credits
Child tax credit
American opportunity tax credit
38
Nonrefundable personal tax credits
- Child and dependant care credit
- tax credit for the elderly and disabled
- adoption credit
- child tax credit (partial)
- American opportunity tax credit (partial)
- lifetime learning credit
- residential energy efficient property credit
- qualified retirement savings contribution credit
39
Child and dependent care credit
35% of qualified expenses incurred for the care of a qualifying individual that enables the taxpayer to be gainfully employed
Must include SSN for qualifying individual AND the dependent care provider
40
Qualifying individual for child and dependent care credit
- qualifying child under age 13
- incapacitated dependent or spouse who lived with the taxpayer for more than 1/2 the year
41
Qualifying employment-related expenses for the child and dependent care credit
- care inside the home: care and household maintenance (not if paid to a relative that is a dependent or a child)
- care outside the home: as long as facility is run in compliance with the law (nursery school and kindergarten count, first grade does not)
- care outside home for an incapacitated dependent or spouse only qualify if individual lives in the taxpayer's home for at least 8 hours a day
42
Qualifying employment-related expenses for the child and dependent care credit
- care inside the home
43
Ceiling on qualified child and dependent care expenses
$3000 for one qualifying individual
$6000 for two or more
No carryover in excess of maximum amounts
Maximum qualifying expense cannot exceed the taxpayer's earned income (for MFJ the earned income of the spouse with a smaller income). Spouse who is a full time student or incapacitated is deemed to have earned income of $250/month)
44
Change in credit rate for child and dependent tax credit as AGI increases
35% if AGI up to $15,000
Reduced by 1 percentage point for each $2000 (or fraction thereof) of AGI in excess of $15,000
Rate goes no lower than 20%
45
If taxpayer receives employer supported dependent care assistance
Qualified expenses for the child and dependent care credit are reduced to the extent that the dependent care costs are funded through employer supported plans
46
Tax credit for the elderly and disabled
Tax credit of 15% of the tax credit base of $5,000 ($7,000 MFJ) reduced by:
- nontaxable benefits from SSI, railroad retirement, or veterans admin pension or annuity
- 1/2 of any AGI in excess of $7500 ($10,000 MFJ)
47
Adoption credit
Credit of up to $14,440 (2021) for qualified adoption expenses allowed in the year the adoption is finalized
Phased out ratably over a $40,000 range for AGI over $216,660
48
Qualified adoption expenses
Reasonable and necessary fee, court costs, attorney fees, and other expenses directly related to the legal adoption of a child who is not yet 18 when the adoption takes place or one who is physically or mentally incapable of self care
Expenses reduced by any reimbursements from an employer plan
49
Adoption credit if adopting a special needs child
Taxpayers allowed maximum credit even if actual expenses were less
50
Child tax credit
For qualifying children under the dependent qualification rules
$3,600 for children ages 5 and under at the end of 2021; and
$3,000 for children ages 6 through 17 at the end of 2021. (So is for all children under age 18)
$500 (nonrefundable) for "qualifying relatives"
51
Child tax credit phase out (the additional $1,600)
The Child Tax Credit begins to be reduced to $2,000 per child if your modified AGI in 2021 exceeds:
$150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
$112,500 if filing as head of household; or
$75,000 if you are a single filer or are married and filing a separate return.
The first phaseout reduces the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold
52
Child tax credit phase out (below $2,000)
The Child Tax Credit won’t begin to be reduced below $2,000 per child until your modified AGI in 2021 exceeds:
$400,000 if married and filing a joint return; or
$200,000 for all other filing statuses.
The second phaseout reduces the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold
53
Calculating child tax credit lost to phaseout amount
(modified AGI - threshold)/1000 rounded up to the next whole number * 50
54
Refundable portion of the child tax credit
If child tax credit is greater than tax liability part of the credit is refundable
Refundable portion is the LESSER OF
- unclaimed portion of the credit,
- 15% of earned income in excess of $2,500, or (if 3+ children this is the greater of this or taxpayer's social security taxes in excess of the taxpayer's earned income credit)
- $1,400 per qualifying child
(Form 8812 to compute)
55
Modified AGI
AGI plus:
Net foreign income excluded
56
American opportunity tax credit
100% of the first $2000 in qualified tuition expenses + 25% of up to an additional $2000 qualified expenses (total possible credit $2,500) for each eligible student in the first four years of postsecondary education
57
Criteria for American opportunity tax credit
- qualified expenses only tuition and fees for enrollment and course materials (textbooks included)
- limited to expenses paid for first four years of postsecondary education (may only be used 4x per student)
- student must be enrolled at least half time at a eligible institution
- eligible student = taxpayer, their spouse, or dependents
- if have felony drug conviction not eligible
58
Treatment of payments made in one tax year for an academic period in the next tax year
If academic period starts in Jan, feb, or March the period is treated as starting during the year in which the payments were made (so can be claimed for tax credit in the year paid)
59
Treatment of scholarship payments for AOTC
Qualified tuition and eligible expenses must be reduced by amounts received as scholarships or from employer-sponsored educational plans
60
Phase out threshold for AOTC
For MAGI over $160,000 MFJ - phased out over $20,000 range. Other filers $80,000 threshold over $10,000 range
Tentative AOTC x ((MAGI - threshold)/ phase out range) = phase out
61
Refundability of AOTC
Up to 40% of allowable AOTC is refundable
62
Lifetime learning credit
20% of qualified education expenses of up to $10,000 a year per family unit (taxpayer, spouse, and dependents)
Nonrefundable
Allowed for unlimited number of years
63
Expenses eligible for lifetime learning credit
- paid during the year for tuition and academic fees (not course materials)
- for postsecondary academic work or courses to obtain or improve job skills
- paid for the taxpayer, their spouse or dependents
Reduced by any tax preferred amounts (scholarships, employee benefits) received
64
Phaseout for lifetime learning credit
- MFJ threshold= $160,000, phase out range = $20,000
- other filers threshold = $80,000, phase out range $10,000
(Threshold revised annually)
Tentative LLC x ((AGI - threshold)/ phase out range) = phase out
65
Choosing between AOTC and LLC
Can only select one credit for each eligible student. If any of the students expenses are used for AOTC in a year then none of their expenses may be used for LLC that year
AOTC cannot be taken if it has already been used for the students for four tax years
66
Residential energy efficient property credit
REEP credit
Valid for tax years through 2021
For non-solar (fuel cell, wind, geothermal) vs solar (water heating and electric generating) energy efficient property installed on a taxpayer's principal residence
Costs eligible for credit include labor cost
Taxpayer's basis in the property is reduced by the amount of the credit
If less than 80% of dwelling is for non business use only nonbusiness percent of credit taken
Swimming pools and hot tubs not eligible
Credits nonrefundable but credits earned but unused may be carried forward
67
REEP credit rates
Property placed in service before 2017: 30%
Property placed in service after 2016: only solar property eligible
Placed in service 2017- 2019: 30%
Placed in service in 2020: 26%
Placed in service in 2021: 22%
68
Qualified retirement savings contribution credi
Aka saver's credit
Credit for up to $2000 in qualified retirement savings contributions
Allowed in addition to allowable exclusions and deductions
% of contributions that can be taken as a credit determined by AGI range
69
Foreign tax credit
Taxpayers with foreign income can take either the FTC or a deduction for foreign taxes paid or accrued to avoid double taxation. The FTC generally results in a greater tax benefit than the deduction
70
Allowable foreign tax credit
The lesser of
- foreign tax paid or accrued, or
- portion of U.S income tax liability attributable to income earned in all foreign countries = (foreign source taxable income / (worldwide taxable income)*US income tax before credits
71
Treatment of unused foreign tax credit
may be carried back one year or forward for ten years to use in years limitation is not exceeded
Anything unused after 10 years is lost
72
General business credits
Credits commonly available to business
Grouped together for the purpose of finding an overall dollar limitation
Excess may be carried back one year and forward 20 years
Used in order generated (carry forward 1st, then current year, then very back
All nonrefundable
73
Credit for rehabilitation expenditures
Credit of 20% of qualified rehabilitation expenditures for older industrial and commercial buildings and certified historic structures - allowed ratably over a 5-year period
Depreciable property held for Trade or business or investment NOT residential rental unless certified historic
74
Qualified rehabilitation expenditures
Renovation, restoration, construction
NOT enlargement or new construction
For buildings other than certified historic structures project must meet structural tests and have QRE exceeding $5,000 or the building's adjusted basis
75
Additional rules for the tax credit for rehabilitation expenditures
- rehabilitation of a certified historic structure must be certified by department of interior
- must use straight line depreciation with sec 168 recovery periods
- basis of property for depreciation is reduced by full amount of credit taken
76
Recapture of tax credit for rehabilitation expenditures
Recaptured at 20% per year if property disposed of in 5-years of date placed in service
77
Business energy tax credits
Can take grants or credits, not both.
Energy conserving priorities constructed, reconstructed or acquired for original use and placed in service before 2017: 30% property basis for solar, fuel cell, or wind. 10% for other (geothermal etc.)
SOLAR energy property acquired or began construction by 2019: 30%, if in 2020: 26%, in 2021: 22%
78
Work opportunity credit
Years before 2026
Credit of certain % of qualified first year wages for hiring individuals from certain targeted groups
79
Work opportunity credit: group A
Credit of 40% of wages up to $6,000
Qualified Veterans
Ex-felons
Designated community residents
Vocational rehabilitation referrals
Summer youth employee
Recipients of welfare programs
80
Work opportunity credit: group B
40% of qualified first year wages up to $10,000 of first year wages and 50% of up to $10,000 of second year wages
Recipients of benefits under long term family assistance
81
Work opportunity credit: group C
40% of qualified first year wages up to $12,000
Veterans with a service related disability hired within 1 year of discharge from active duty
82
Work opportunity credit: group D
40% of qualified first year wages up to $14,000
Veterans with 6-months or more of unemployment in the year before hire
83
Work opportunity credit: group E
40% of qualified first year wages up to $24,000
Veterans with a service related disability
hired within 1 year of discharge from active duty or with more than 6 months of unemployment before the year of hire
84
Employer provided child care credit
Sum of:
25% of qualified child care expenses
Plus
10% of qualified child care resources and referral expenditures
May not exceed $150,000 in a tax year
May not claim deduction and credit. Expenses otherwise deductible are reduced by the amount of the credit claimed
85
Recapture provisions for employer provided child care credit
If use of facility as a qualified child care facility is terminated within ten years of the year the child care facility is placed in service original credit must be recaptured
100% recapture if terminated in first three years and then declines
86
Disabled access credit
50% of eligible expenditures exceeding $250 but not over $10,250, incurred to make existing facilities accessible to disabled individuals
(Max annual limit $5000)
Credit reduces deduction for eligible expenses
Payments made in connection with a new facility are not eligible
Depreciable basis of the property is reduced by the credit amount
87
Small businesses eligible for disabled access credit
Either
- gross receipts of $1M or less in preceding year
Or
- no more than 30 full time employees in the preceding year
88
Credit for increased research activities
Sum of:
- regular research credit
- University basic research credit
- Energy research consortium credit
Rate of 20% of excess qualified research expenses over base amount
89
Qualified research expenses
Internal and external research expenses that are incident to the development or improvement of a product or component.
Only incremental expenditures in excess of a base amount are eligible
Research conducted after start of commercial production does not qualify (also not marketing, advertising, or production expenses)
90
Base amount for qualified research expenses
Greater of:
1) product of the taxpayer's fixed-base percentage and annual gross receipts over the four years prior to the credit year, or
2) 50% of credit year qualified research expenditures
91
Base amount for qualified research expenses
Greater of:
1) product of the taxpayer's fixed-base percentage and annual gross receipts over the four years prior to the credit year, or
2) 50% of credit year qualified research expenditures
92
Calculating fixed-base percentage for credit for increased research activities
Historical ratio of qualified research expenditures to gross receipts but limited to 16%
Based on table
93
Simplified credit for increased research activitirs
Not based on historical gross receipts.
- 14% of the excess qualified research expenses from the current year / 50% of the average qualified research expenses for preceding three taxable years, or
- 6% of qualified research expenses in the current year if the taxpayer does not have qualified research expenses in the previous three tax yearw
94
General business credit overall limitation
May not exceed the smallernof
95
General business credit limitation
May not exceed the smaller of:
- net income tax less tentative minimum tax and
- net income tax less (.25*(net regular tax - 25,000)
96
Net income tax
Sum of net regular tax liability and the AMT reduced by nonrefundable personal credits and foreign tax credit
97
Net regular tax liability
Regular tax reduced by nonrefundable personal tax credits and the foreign tax credit
98
Refundable personal credits
Earned income credit
Parts of AOTC and the child tax credit
99
Earned income credit
Based on taxable employee compensation + net earnings from self employment
Not available if "disqualified Income" is above $3,650 (2021)
Available to individuals with qualifying children and some individuals without children of they meet requirements
(Married taxpayers must file jointly to be eligible)
Credit based on # of qualifying children and income earned
100
EIC disqualified Income
Taxable interest income and dividends
Tax-exempt interest income
Net income from nonbusiness rents or royalties
Net capital gains
Net passive activity income
101
Requirements for individuals without children to qualify for the EIC
- principal place of abode in US for more than 1/2 the tax year
- individual (and spouse) is at least 25 and not more than 64
- not a dependent or qualifying child of another taxpayer
102
Calculating EIC
Tentative EIC = credit rate x credit base for number of qualifying children.
Phase out amount = phase out rate x (AGI- phase out threshold)
Allowed EIC= tentative EIC - phase out amount
103
Health insurance premium assistance credit
Aka premium tax credit
Excess of qualifying health insurance premiums over premium amount deemed affordable based on the taxpayer's household income
104
Withholding of tax when working for more than one employer during the same year
Each employer withholds FICA and income tax without regard to the other.
Over withholding of employee portion of FICA: excess is credited as additional tax payment
Excess employer FICA contributions: not refundable or creditable against tax liabilities of employer or employee
105
When are taxpayers exempt from income tax withholding?
- if they had no tax liability in the prior year
- expect no tax liability in the current year
- can be claimed as a dependent and report no more than $1100 total income (no more than $350 unearned)
Earnings still taxable. Just withholding not required
106
Employment activities exempt from withholding
Agricultural laborers
Ministers
Household employees
Newspaper carriers under 18
Those earning tips of less than $20/month
Earnings still taxable, employers still responsible for matching FICA payments
107
Backup withholding
24% withholding rate required on most types of payments where a 1099 is required if a proper taxpayer identification number is not provided
108
W-4
Employees withholding certificate
Amended w-4 must be supplied to the employer within 10 days of a change in employees circumstances
109
Information on a W-4
Filing status
Number of qualifying children for child tax credit
Number of jobs held by taxpayer and spouse
Additional deductions/losses/credits expected
Expected tax savings from 21-41 credits
110
Required estimated tax payments to avoid underpayment penalty
Must equal or exceed any of the following
- 90% of current year tax liability
- 100% of the prior year tax liability if the taxpayer's AGI was $150,000 or less or 110% of the prior year's tax liability if the taxpayer's AGI was more than $150,000
- 90% of current year tax liability computer on annualized basis
No penalty imposed if:
- estimated tax for current year is under $1000 or if no tax liability in the prior year
111
Deadlines for calendar year quarterly estimated tax payments
April 15
June 15
September 15
January 15 (following year)
112
Form to determine potential underpayment penalty or if exception applies
Form 2210
113
Does the IRS have to pay interest on refunds
Not if refund paid within 45 days from the later of the due date of the return or it's filing date
114
Withholding vs estimated tax payments
Even if increased at the end of the year withholding is treated as being made evenly over the year
