EA Part 1 Session 3 Flashcards
Net Investment income includes:
a) Interest income, except Municipal Bonds, b) Dds and capital gains, Rental and Royalty income c) No qualified annuities, d) Income from trading of financial instruments or commodities, Income from businesses that are passive activities for taxpayer like limited partnership.
Net investment income doesn’t include Earned Income or Pension Income,
MFJ $250,000
MFS $125,000
Single $200,000
Note: Calculate the NII when MAGI is higher than the threshold above.
It would be the lesser of excess of MAGI threshold or the total NII multiply by 3.8%.
Additional Medical Tax Form 8959
only apply to Earned income rate of 0.9%. The tax is assessed on Earned Income in excess of the following:
MFJ $250,000
MFS $125,000
Single, HOH, or QSS $200.000
The employee (or self-employment) is the one paying not the employer.
Deductible Interest:
Qualified interest payments are deductible as itemized deductions on Form 1040, schedule A. Deductible interest includes:
1- Home mortgage interest ( Personal home for primary residence)
2- Late fees on a mortgage loan: If someone paid a late fee because the paid their mortgage late = late fee and can be deducted. EXAM
3- Point on a mortgage loan
4- Investment interest expense (any interest incurred on loan used to purchase taxable investments. NB: this is up to the amount of Net Investment Income not more. Even if the Investment interest expense is higher than NII go by the NII amount.
NB: If you don’t have investment income you can carry the investment expense for the following year.
A taxpayer can deduct the mortgage interest on up to 2 personal homes.
If taxpayer pays off their mortgage early. the taxpayer may have to pay a mortgage penalty. The penalty is deductible as mortgage interest on Schedule A.
Taxpayers can deduct mortgage interest on a main home and a second home.
CHARITABLE CONTRIBUTION
CHARITABLE donations of appraised stock are usually valued at the FAIR MARKET VALUE OF THE STOCK ON THE DATE OF THE DONATION.
Contribution to appreciated property is 30% of AGI limit.
Any noncash Charitable Contributions ‘donation’ over $500 must be described on Form 8283
For donation of less than $250 to a qualified charity you need as documentation: a cancelled check, bank or credit union statement, credit card statement, or a receipt that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution.
The value of a person’s time and service is not deductible
Net investment income does not include “earned” income, such as wages, retirement income or self-employment earnings.
In general, investment income includes: interest, dividends, capital gains, rental and royalty income, non-qualified annuities and income from other passive activities.
Net Investment income does NOT include: wages, unemployment compensation, income from a (non-passive) business, Social Security Benefits, taxable alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends, and distributions from certain Qualified Plans.
Child and Dependent Care Credit:
This is for: a) Care for a child under age 13 or b) Care for a disabled dependent or a disabled spouse of any age.
ADOPTION CREDIT Form 8839
Is not refundable, nut any amount the taxpayer cannot claim on the current year’s return can be carried over for up to 5 years.
For adoptions finalized in 2023, there is a federal adoption tax credit of up to $15,950 per child. For an adoption of a child with special needs, this means that you can claim the full adoption credit, even though your actual expenses are much less.
A foreign child with a disability would not qualify for the special-needs adoption credit.
Costs for adopting a step-child, or the child of one’s spouse, are not qualifying adoption expenses. The costs of a surrogate parenting arrangement also are not deductible.
Child Tax Credit ($2,000 under the age of 17) and Other Dependents:
In order to qualify for the Child Tax Credit or Additional Child Tax Credit, the child must be under the applicable age limit (which is 17 in 2023) at the end of the tax year. There are no exceptions.
The maximum Other Dependent Credit ‘ODC’ is $500 for each
dependent.
The maximum amount of Child Tax Credit is $2,000.
NB: ODC can be claimed for
a) Dependent of any age, including those who are 18 or older
b) Dependents who have social security numbers or individual taxpayer identification numbers ‘ITINs’
c) Dependent parents or other qualifying relatives supported by the taxpayer.
d) Dependents living with the taxpayer who aren’t related to the taxpayer.
In order for the taxpayer to claim the Child Tax Credit, the child must have an SSN that’s valid for employment and issued before the due date of the return (including extension).
Additional Medicare Tax
Note: Higher-income taxpayers must pay an additional Medicare tax.
The additional tax rate is 0.9% of employee income, and applies to “earned income” like wages and self-employment income. Once earnings reach $200,000 in a calendar year, ($250,000 for MFJ and $125,000 for MFS) the Additional Medicare Tax will apply.
Married Filing Jointly $250,000
Single, HOH, QSS $200,000
Married Filing Separately $125,000.
If your income exceeds the threshold you will owe both Affordable Care Act taxes The 0.9% additional Medicare tax and the 3.8% net investment income tax
The ACA and the Premium Tax Credit Form 8962
- For individuals requesting the APTC (Advance Premium Tax Credit), the Marketplace determines whether the employer coverage is “affordable” by comparing the employee’s cost of the employer coverage for self-only coverage to household income.
Under the Affordable Care Acts “ACA”, a full-time employee is an employee who works on average 30 hours or more per workweek.
A Premium Tax Credit or the Advance Premium Tax Credit is not allowed for the coverage of an individual who is not lawfully present in the United States.
The Premium Tax Credit is a refundable tax credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace.
You need the information on Form 1095-A to complete Form 8962 to reconcile any advance payments of the premium tax credit.
Other Credits
The Retirement Savings Contributions Credit (Saver’s Credit) is a credit for low-income and moderate-income taxpayers who save for retirement. The retirement savings contribution credit is worth up to $1,000 ($2,000 if married filing jointly). Taxpayers may be eligible for the credit if they are:
- Age 18 or older,
- Not claimed as a dependent on another person’s return, and
- Not a full-time student.
The adoption credit is nonrefundable, however, taxpayers can carry any remaining unused credit for up to five years, or until they fully use the credit, whichever comes first.
qualifying child must meet 4 tests:
1-The age test: (must be 18 or under, a full-time student age 23 or younger, or completely disabled of any age);
2-The joint return test: (must not file a tax return with a spouse except to claim a refund);
3-The residency test: (must have lived with the taxpayer in the United States for more than half the year).
4-The relationship test: requires that the qualifying child be related to the taxpayer in any of the following ways: child, stepchild, foster child, or descendant of any of them (for example, a grandchild), OR sibling, half-sibling, stepbrother, stepsister, or descendant of any of them (for example, a niece or nephew).
A taxpayer can’t claim an education credit if any of the following apply:
1- Their filing status is married filing separately.
2- They are claimed as a dependent on another person’s tax return.
3- The taxpayer didn’t have a social security number (SSN) (or ITIN) by the due date of the return (including extensions).
4- The taxpayer’s MAGI exceeds the phaseout thresholds for the credit.
Earned Income Tax Credit
The PATH Act mandates that the IRS not issue a refund on tax returns claiming the Earned Income Tax Credit until Feb. 15.
Supplemental Security Income (SSI), also known as Social Security Disability Insurance, is not considered earned income and cannot be used to claim the EITC.
Earned income for purposes of the EITC includes the following:
- Wages, salaries, tips, and other taxable employee pay.
- Union strike benefits.
- Net earnings from self-employment.
- Long-term disability benefits received prior to minimum retirement age (after reaching minimum retirement age, the IRS considers these payments as a taxpayer’s pensions and therefore not as earned income).
- Combat pay.
Child and Dependent Care Credit must be 13 year
Child Tax Credit must be 17.
To qualify for the EITC, the taxpayer must:
1- Have worked and earned income
2- Have investment income below $11,000 in the tax year 2023
3- Have a valid Social Security number by the due date of the return (including extensions)
4- Be a U.S. citizen or a U.S. resident alien all year
Not file Form 2555 (related to foreign earned income).
To qualify for the Earned Income Tax Credit, a taxpayer must be a U.S. citizen or legal resident all year, and have a valid SSN that is valid for work purposes. A taxpayer does not need to have a dependent child in order to qualify for the Earned Income Tax Credit; however, the EITC is greatly increased if the taxpayer has a qualifying child. A taxpayer must have earned income to qualify for the EITC, but there are other types of earned income that exist besides wages, such as tips and self-employment income, which would also be qualifying income for EITC purposes.
Coverdell ESA is someone who is under age 18 or is a special needs beneficiary. A Coverdell ESA can be used to pay either qualified higher education expenses or qualified elementary and secondary education expenses. Income limits apply to contributors, and the total contributions for the beneficiary of this account can’t be more than $2,000 in any year, no matter how many accounts have been established.
Tax on Household Employees
The household employee reporting threshold is $2,600 in 2023.
“household employees” include housekeepers, maids, personal chauffeurs, babysitters, gardeners, and others who work in or around the taxpayer’s private residence as their employees. Schedule H is used to report wages paid to a household employee.
to avoid an estimated tax penalty resulting from his liability for employment taxes in connection with household employees, as shown on Schedule H. The taxpayer has several options. He can:
1- Increase his federal income tax withheld by giving his employer a new Form W-4, or
2- Make estimated tax payments by filing Form 1040-ES, Estimated Tax for Individuals.
Qualified Business Income Deduction
The Section 199A deduction has two components.
1- The QBI Component. This component of the deduction equals 20 percent of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate.
2- The REIT / PTP Component. This component of the deduction equals 20 percent of the combined qualified REIT dividends (including REIT dividends earned through a regulated investment company (RIC) and qualified PTP income.
QBI is the net amount of income, gain, deduction, and loss from any qualified trade or business (QTB), including those conducted through:
- Sole proprietorships,
- S corporations,
- Partnerships,
- Trusts and estates.
QBI Does Not Include:
Items that are not properly includable in taxable income.
Investment items such as: capital gains and losses, dividends, or interest.
Income not properly allocable to a trade or business.
Wage income reported on Form W-2 (with the exception of statutory employees).
Income that is not effectively connected with the conduct of a business within the United States.
Income earned by a C Corporation.
Note: When calculating a taxpayer’s qualified business income deduction, the taxpayer must calculate their QBI separately for each business, but combine them as one in order to calculate total QBI and/or any carryover (if applicable). So, if a taxpayer has a loss in one business and a net profit from another, the loss will reduce the QBI from the business that is showing a net profit. In other words, negative QBI from one business will offset positive QBI from other trades or businesses.
Specified Service Businesses (SSTBs) include: medical professionals, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. Architecture and engineering are specifically not included in the list.
UBIA is tangible property subject to depreciation that is held and used in the production of QBI by a business.
UBIA can include assets like business machinery, office buildings, and livestock for farmers. In most cases, UBIA is the original purchase price of the asset. UBIA does not include inventory or land (because land and inventory are never depreciated).
