Credits, AMT, and Losses

Question 1

WHAT is the allowable Work Opportunity Tax Credit for a long-term family assistance recipient?

Answer 1

• 40% UP to $4,000 first-year credit; AND
• 50% of first $10,000 (i.e. max of $5,000) for the second year
  i. e. the maximum amount that can be claimed is $9,000

Question 2

WHAT is the maximum credit for adoption expenses (per child) that a taxpayer can take?

Answer 2

$13,810 per child

Question 3

IN what years may a taxpayer carry their Net Operating Losses (NOL)?

Answer 3

Only Forward (INDEFINITELY)

i.e. A net operating loss may only be carried forward to the years following the taxable year of the loss

Question 4

WHAT is considered a “passive activity?”

Answer 4

ANY activity involving the conduct of a trade or business or the production of income and in which the taxpayer does not materially participate

Note: This excludes any working interest in oil or gas property (in which the form of ownership does NOT limit liability)

Question 5

WHAT are Alternative minimum tax (AMT) preferences?

Answer 5

Items that are allowed relatively favorable treatment in determining regular taxable income

i.e. These preferences are added back to “Taxable Income” (TI) to find AMTI

E.g. Tax-exempt interest from private activity bonds; Or Depletion in excess of adjusted basis

Question 6

WHAT are some item(s) that may be deducted in the computation of alternative minimum taxable income (AMTI)?

Answer 6

• Charitable contributions
• One-half portion of the self-employment tax
• Traditional IRA account contributions

Question 7

True or False.

Taxes are allowed in calculating the AMT.

Answer 7

FALSE.

Taxes are NOT allowed in calculating the AMT.

i.e. Only certain itemized deductions are allowed in calculating the AMT (e.g. home mortgage interest on a loan to acquire a principal residence)

Question 8

WHEN do passive activity losses become deductible in full?

Answer 8

IN the year the taxpayer completely disposes of all interest in the passive activity

Question 9

WHAT is Alternative Minimum Taxable Income (AMTI)?

Answer 9

Taxable income increased by tax preferences; and

Increased or decreased by adjustments and other statutory modifications

Question 10

HOW do you calculate the “phased out” credit amount when modified AGI exceeds the joint filers limit (i.e. $160,000) - (American Opportunity Credit)?

Answer 10

[$2,500 × (Tax Payer Income – Phase-out Minimum (i.e. $160,000) ÷ $20,000] - For MFJ (Max is $180K)

[$2,500 × (Tax Payer Income – Phase-out Minimum (i.e. $80,000) ÷ $20,000] - For All Others (Max is $90K)

Question 11

WHAT items must be added back to the individual taxpayer’s loss as modifications in computing their Net Operating Loss (NOL)?

Answer 11

• Business capital losses in excess of business capital gains
• Nonbusiness deductions in excess of nonbusiness income
• NOL carryovers from other years

Question 12

HOW do you calculate the “allowed credit” for a taxpayer over 65 years old?

Answer 12

IT is 15% of the individual’s reduced base amount (starts at $5,000)

= Initial base amount ($5,000) - AGI limitation (which is AGI - $7,500) x 15%

Question 13

HOW do at-risk rules limit a taxpayer’s deductible losses?

Answer 13

BY the amount of each business and income-producing activity:

• UP to the amount for which the taxpayer is at risk (with respect to that activity)

Question 14

WHAT is the depreciation adjustment for property placed in service after 1999?

Answer 14

The alternative depreciation system of Sec. 168(g):

• With the 150%-declining-balance method (switching to straight-line when larger) for personal property

Question 15

WHAT is the gross income threshold (and allowed percentage) for a taxpayer eligible for the Child Care Credit?

Answer 15

$15,000

The applicable (allowed) percentage of employment-related expenses is 35%

NOTE: This percentage is reduced (but not below 20%) by one percentage point for each $2,000 (or fraction thereof) above the $15,000 threshold

Question 16

WHAT is a tax credit considered “a combination of several tax credits” that provides uniform rules for the current and carryback-carryover years?

Answer 16

The General Business Credit

Question 17

WHAT business entity is NOT subject to the excess business loss limit?

Answer 17

C Corporations

i.e. C corporations are excluded from this limitation and allowed to offset pass-through losses received from pass-through entities against non-business income (e.g., capital gains)

Question 18

WHAT is the maximum amount an individual may deduct of capital loss(es) each year against ordinary income?

Answer 18

UP to a maximum of $3,000 against ordinary income

Question 19

HOW much can an employer claim for an employee under the Work Opportunity Tax Credit?

Answer 19

40% of the first $6,000 of wages paid (Up to $4,000 if part of Family Assistance) to a qualified employee (in their first year of service)

NOTE: An employee must have completed a minimum of 120 hours of service (to be eligible)

Employer is entitled to a credit of 25%; if the employee does 120-hour minimum but less than 400-hours of service

Note: Under Family Assistance, the maximum is $9,000 ($4,000 year 1 and $5,000 year 2)

Question 20

To whom do the at-risk rules NOT apply?

Answer 20

A closely held corporation (i.e. five or fewer individuals owning more than 50%) actively engaged in equipment leasing