Credits and AMT Flashcards
Child and dependent care credit
First of all we need to determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. So of the $8,000 spent, only $4,000 will qualify. The maximum eligible for 1 dependent, though, is $3,000. Then it is further limited because it is limited to the lowest earned income of either spouse. That would be Mary’s $2,500. Due to their combined income level, they are in the 20% credit range. The credit is 20% of $2,500, or $500.
Refundable credits
The child and dependent care credit is nonrefundable. The only refundable credits are the child tax credit (which is a different credit with a similar name), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid. The child and dependent care credit is a “personal” tax credit
AMT PREFERENCES
Tax exempt interest from private activity bonds (generally) and accelerated depletion, depreciation, or amortization are alternative minimum tax preference items. Charitable contributions of appreciated capital gain property are not alternative minimum tax preferences.
AMT computation
The alternative minimum tax (AMT) is computed as the excess of tentative AMT over the regular tax.
Amt
Both mortgage interest and miscellaneous itemized deductions are deductible for regular (schedule A) tax purposes. However, miscellaneous itemized deductions are “adjustments” and, therefore, are not allowed as deductions for alternative minimum tax (AMT) purposes.
Amt
Per the mnemonic “PANIC TIMME,” for purposes of calculating alterative minimum taxable income, the taxpayer must add back, among other things, the following itemized deductions:
Taxes reduced by taxable refunds,
Home mortgage interest when the mortgage loan proceeds were not used to buy, build, or improve the taxpayer’s qualified dwelling (house, condominium, apartment, or mobile home not used on a transient basis),
Medical expenses not exceeding 10% of AGI, and
Miscellaneous deductions subject to the 2% of AGI floor.
The “PANIC TIMME” add-back is as follows:
Taxes
$ 18,000
Home mortgage interest not used to buy, build, or improve a qualified dwelling (the motor home is not a qualified dwelling)
15,000
Medical expenses in excess of 7.5% AGI but not in excess of 10% of AGI (7.5% AGI is still used for taxpayers age 65 and over)
3,750
Deductible miscellaneous expenses in excess of 2% of AGI
2,000
Total “PANIC TIMME” add-back
$ 38,750
Amt und
. Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. Personal exemptions are added back. Therefore, they are not deducted to arrive at alternative minimum taxable income.
Amt
Casualty losses are not added back in the alternative minimum tax (AMT) calculation. Therefore, they are allowed as a deduction.
Estimated taxes
I.
Payment of 90% of the tax on the return for the current year avoids the penalty for underpayment of estimated tax.
II.
Generally, payment of 110% of the prior year’s tax liability avoids the penalty for underpayment of estimated tax when the taxpayer’s AGI from the prior year exceeds $150,000.
Note: Payment of the lesser of the two above will provide “safe harbor” to the taxpayer.
1040X
An individual submits a claim for refund of erroneously paid income taxes on Form 1040X.
Dates
When the return is filed early, the latest date the IRS can assess tax is 3 years from the date the return is due (April 15, Year 6 in this case).
Estimates
In computing the amount of estimated payments due, an individual taxpayer may choose between the annualized method (90% of current year’s tax), or the prior year method (100% of last year’s tax) unless the taxpayer’s adjusted gross income exceeds $150,000 then they must use 110% of last year’s tax. Therefore, the taxpayer in this example can use the annualized method. The seasonal method is not permitted.
