Chapter 8

Question 1

Kiddie Tax - who does it apply to?

Answer 1

Applies to or potentially applies to a child if

1) Child is under 18 at year-end
2) Child is 18 at year-end but earned income does not exceed half of support
3) Child is over 18 but under 24 at year-end and is full-time student during year and earned income does not exceed half of support (excluding scholarships).

Question 2

Who does kiddy tax not apply to?

Answer 2

Married child filing joint tax return or a child without living parents.

Question 3

What must be paid on the kiddy tax?

Answer 3

In general, if kiddy tax applies, children must pay tax on a certain amount of their net unearned income at tax rates that apply to trusts and estates rather than at marginal tax rate.

Question 4

What is the kiddie tax base?

Answer 4

Kiddie tax base is child’s net unearned income. Net unearned income is lesser of:

1) Child’s gross unearned income minus $2,100 or
2) Child’s taxable income (child is not taxed on more than taxable income)

As a result, kiddie tax does not apply unless child has unearned income in excess of $2,100.

Question 5

AMT adjustments

Answer 5

Plus:
Tax-exempt interest from private activity bonds
Real property and personal property taxes deducted as itemized deductions
State/income sales taxes

Plus/Minus Adjustment:
Depreciation

Minus:
State income tax refunds included in regular taxable income
Gain/loss on sale of depreciable assets

Question 6

Itemized deductions for regular tax and AMT using same limitations

Answer 6

Charitable contributions, home mortgage interest expenses, gambling losses.

Question 7

AMT exemption

Answer 7

Amount depends on taxpayer’s filing status. Exemptions phased about by 25 cents for every dollar AMTI excceds threshold.

Question 8

How are LTCGs and dividends repurposed in the AMT?

Answer 8

Taxed at same preferential rate as they are for regular tax purposes, 0, 15 and 20%.

Question 9

Minimum tax credit

Answer 9

Some taxpayers who pay AMT entitled to it. Used when regular tax exceeds tentative minimum tax. Can use credit to offset regular tax but not below tentative minimum tax for that year.

Question 10

Factors suggesting independent contractor status

Answer 10

1) Sets own working hours
2) works part-time
3) works for more than one firm
4) realizes profit/loss from activities
5) performs work somewhere other than employer premises
6) works without frequent oversight

Question 11

Independent contracts and employees differ with respect to

Answer 11

Amount of FICA taxes payable and deductibility of business expenses.